Our timely perspectives on key global economic forces and the long-term investment strategies to consider, highlighted by the Monthly Market Monitor.
Income Market Insight
Payson Swaffield, April 2014
Fans of NASCAR racing, and most other motorsports, know what it means when the yellow flag is being waved: proceed with caution. For investors in today’s credit markets, we believe that is an appropriate image to keep in mind. After five years of generationally low rates, investors are “stretching” for yield – that is, they are scooping up deals at yields that, in our opinion, barely compensate them for the risk.
How bad is your Tax Day hangover?
Municipal Insight Committee, April 2014
This tax season many investors in higher tax brackets were rudely awakened to the reality of paying 50% of their income in federal and state taxes. Given the new tax landscape, income municipal bonds may look more appealing than ever.
Equity Market Insight
Thomas E. Faust Jr., April 2014
After a powerful rally in 2013, the first quarter of 2014 saw the bull market demonstrate a measure of resilience in the face of several headwinds. In the latter half of January, stocks fell sharply on emerging-market concerns, with volatility spiking to more “normal” post-financial crisis levels. The market bounced back strongly in February and went on to record a new all-time closing high on March 7. Performance was choppy in the final few weeks of the quarter, as investors digested mixed economic reports, geopolitical issues and the latest U.S. Federal Reserve (Fed) meeting.
Pursue better after-tax equity returns
With higher capital gains tax rates, investors in high tax brackets can particularly benefit from strategies designed to deliver better after-tax equity returns.
Economic Insight: Fed policy goes back to the future
Thomas Luster, April 2014
We fully expected the strength the economy showed in late 2013 to carry over into 2014; however, that was simply was not the case. Instead, we saw weaker-than-expected economic data across a wide range of economic indicators.
In the coming weeks, we believe the data will confirm that severe winter weather patterns, slower global growth (especially in China) and a reduction of last year’s inventory build were worthy of blame for the loss of economic momentum in the first quarter.
Investing in the Wake of the “Great Moderation:” Floating-Rate Loans as a Strategic Allocation
Scott Page, Craig Russ, Christopher Remington; April 2014
Floating-rate loans deserve consideration as a strategic portfolio position today because they may help:
• Boost income in a low, flat-rate environment with yield potential that’s competitive with or greater than many longer-duration fixed-income investments.
• Protect fixed-income portfolios against a potential rising-rate scenario and the erosion of fixed-income values that would result.
• Reduce portfolio risk with historically near-zero duration and low correlation with other fixed-income sectors.
Have you looked at India lately?
Eric Stein, Patrick Campbell; March 2014
In our judgment, it’s time to remove India from the ranks of the so-called “Fragile Five” emerging-market countries. We believe the strong investment case to be made for India today underscores the importance of taking a country-by-country approach to emerging-market investing.
The Midterm Elections (And a Peek Toward 2016)
Andrew H. Friedman, March 2014
With fiscal deadlines out of the way for 2014, attention is now turning toward the 2014 midterm elections. This white paper covers a variety of Washington political matters: the reason for rampant partisanship in Washington and what it means going forward, what is likely to happen in the midterm elections and a glimpse toward the presidential election of 2016.
Michael Cirami on Ukraine: It May Just Be Spring Training for Putin’s Hardball Tactics
Michael Cirami, March 2014
Earlier this month, Michael Cirami, co-director of Eaton Vance’s Global Income Group, offered his views on the immediate crisis surrounding the seizure of Crimea by Russian and pro-Russian troops, having been in Kiev just two weeks prior. In this Viewpoint, he adds some perspective to how events have unfolded since and how they may going forward in the wake of that event.
Eaton Vance Viewpoints: Timothy Atwill on “Systematic Alpha” Investing
Timothy Atwill, March 2014
Timothy Atwill, CFA, Ph.D., Director – Research and Strategy for Parametric, discusses Parametric’s innovative investment approach — known as “systematic alpha” — and its application to emerging-market investing.
Emerging markets: fertile ground for country picking
Michael A. Cirami, Eric Stein, John R. Baur, Bradford Godfrey, Matthew F. Murphy, Jr.; March 2014
Given the variations among individual emerging countries in today’s environment, country-by-country differentiation is likely to remain key to successful emerging-market investing.
10 Tax-Management Strategies to Consider in a Rising Tax Environment
When it comes to investing, we believe the most important thing is determining not what you make, but what you keep. The goal of tax management in an investment program is to maximize after-tax returns. We believe this strategy is even more critical, with investors now waking up to the fact that tax rates have risen considerably.
The American Industrial Renaissance Revisited
Richard Bernstein, Q1 2014
It remains unlikely that the United States will be the manufacturing powerhouse that it was during the 1950s and 1960s, but many factors are suggesting that the U.S. industrial sector will continue to gain market share.
Michael Cirami on the Ukraine Crisis
Michael Cirami, March 2014
Investors tend to ignore events that do not demand immediate attention. Unfortunately, this approach is no longer an option following the recent events taking place in the Ukraine. Michael Cirami, portfolio manager in Eaton Vance’s Global Income Group, was in Kiev the week before President Yanukovych was ousted. In the following interview, he shares his views on the crisis in this emerging market and its implications for investors.
Consider paying a premium for municipal bonds: Focus on yield to worst rather than a municipal bond’s price
Municipal Insight Committee, March 2014
• The price of a premium municipal bond should not be the sole determinant of value
• Yield to worst is a meaningful metric to help determine the value and risk of a premium municipal bond
• In rising rate environments, higher cash flows from a premium municipal bond may help to protect purchasing power
Market Share: The next secular investment theme
Richard Bernstein, Q1 2014
A myopic focus on profit margins may miss an important investment consideration. Whereas most investors remain fearful of margin compression, we prefer to search for an investment theme that could emerge if margins do indeed compress.
Equity Bubble? No.
Richard Bernstein, Q1 2014
A growing contingent of market observers is fearful that the U.S. equity market is in some sort of a bubble. We disagree completely with this notion. A strong market rally that many investors have missed is hardly sufficient grounds for a financial bubble.
Confronting the tax drag
• The impact of the “tax drag” on investor portfolios can be significant over long time frames, potentially consuming a quarter or more of every dollar earned by the average investor.
• As federal tax rates have risen for many investors, so too has the risk of losing a larger portion of one’s returns to taxes—highlighting the need for a tax-aware investment approach.
• Municipal and tax-advantaged bond strategies, tax-efficient equities and solutions for high-networth investors can all help improve investors’ after-tax portfolio performance.
Are you managing volatility or is it managing you?
Market volatility has often caused investors to make emotional decisions, resulting in performance that may have hindered their progress toward long-term goals.
Eaton Vance believes that a sound investment strategy can and should provide long-term investors with the tools needed to effectively manage market volatility.
Congress Raises the Debt Limit: Is This the End of the Budget Battles?
Andrew H. Friedman, February 2014
Last week Congress – faced with an impending snow storm and a desire to get home for the Presidents Day holiday – hastily passed legislation permitting the federal government to continue to borrow funds through March 15, 2015. Coupled with the agreement reached last December to fund the government through September 30, 2015, this action eliminates the prospects of additional fiscal showdowns for at least the remainder of 2014.
7 timely questions about today's floating-rate loan market
Scott Page and Craig Russ, February 2014
Floating-rate loans exhibited impressive performance in 2013, finishing the year as one of only two major fixed-income sectors (along with high-yield bonds) to show a positive return for the year. After this kind of run, do loans still offer value to investors? The Eaton Vance Floating-Rate Loan team believes the market still has significant fundamental strengths, including reasonable spreads, strong balance sheets, low overall default rates and a healthy supply/demand balance.
Puerto Rico Rating Downgrade: The potential impact on the municipal bond market
Municipal Insight Committee, February 2014
With a flurry of media coverage over S&P’s downgrade of Puerto Rico, Eaton Vance shares its views on the situation, the potential impact on the broader municipal (muni) market and what muni investors should be mindful of going forward.
Bond investing in a rising rate environment
Kathleen Gaffney, February 2014
After a transitional year like 2013, when a multidecade declining rate environment moved to a rising rate environment, we think it is important for investors to consider a multisector approach to finding value in the bond market. Finding bonds that can appreciate in price regardless of the interest-rate environment is what a multisector strategy generally seeks to accomplish. With interest rates still near historic lows and many bond investors concerned that yields will rise as ultra-accommodative monetary policy by the Federal Reserve (the Fed) comes to an end, we believe it makes sense to hunt for good relative values across a broad range of asset classes, particularly in nontraditional places.
New Year, Same Higher Taxes
Investors may be cheering a strong year of stock gains in 2013, but a rude surprise may be right around the corner. For 2013, the combined effect of several tax increases (capital gains, health care and reinstated limitations) will increase the tax burden on many investors by nearly 60%. These higher tax rates will remain in effect for 2014, so mitigating the tax drag on investment returns will continue to be a top priority for investors. We begin our look at what taxpayers can expect with a summary of the new 2013 tax rates.
Floating-rate loans: Core value remains as the need for selectivity rises
Scott Page, Craig Russ, Christopher Remington; January 2014
The strategic case for the floating-rate loan asset class has historically centered on the securities’ combination of attractive yield potential and near-zero duration, delivered through senior/secured obligations – debt that typically has the highest priority of claims in an issuer’s capital structure and is secured by specific collateral. With the asset class experiencing strong investor interest and inflows in 2013, we examine a number of considerations that have arisen to determine if the case, indeed, remains valid. These include: valuation, Libor floors, credit risk, covenant-lite issuance, an expanding retail investor base, TXU, and new regulations.
Attractiveness of municipal bonds should not be overlooked in 2014
Municipal Insight Committee, January 2014
After a challenging year for the municipal bond (muni) market in 2013, we believe the underlying strength of munis has improved, making the asset class an attractive proposition heading into 2014. In our view, challenges and headwinds will continue in 2014; however, more palatable yields and the relative attractiveness of munis versus other taxable alternatives may help investors limit the volatility and downside witnessed over the past year.
Important dates to watch in 2014
Andrew H. Friedman, January 2014
Looking forward into 2014, four dates – February 7, March 31, April 15 and November 4 – stand out as pivot points for events that could affect the markets, particular industries, and tax and financial planning.
Key Investment Themes for 2014
Richard Bernstein, January 2014
Richard Bernstein annually publishes a list of investment themes that he believes are critical for the coming year.
Like a Shakespearean script
Richard Bernstein, December 2013
Like the different plots in various Shakespearean plays, the catalysts that begin and end each market cycle as well as the events during the cycle are always different. However, market cycles seem to follow a script and, so far, this cycle seems to be following the script almost perfectly.
Is your inflation protection really protecting you?
Thomas Luster, Stewart Taylor, Kevin Dachille, December 2013
Many investors who own Treasury Inflation-Protection Securities (TIPS) and TIPS mutual funds don’t realize that they may be taking a significant amount of interest-rate risk in exchange for their inflation protection, which may result in losses when rates begin to rise rapidly. Investors may consider an inflation-protection investment strategy that avoids longer-term TIPS and seeks real returns through a strategy of using shorter-maturity TIPS and other shorter-duration assets, like floating-rate loans.
Unresolved Issues Dominate as Washington Enters 2014
Andrew H. Friedman, November 2013
The compromise Congress reached to reopen the federal government and permit the United States to borrow funds kicked the can down a very short road. It set up a bipartisan committee to agree on an appropriations plan to finance government operations through 2014. If that committee fails to agree, then on January 15, 2014, Congress can agree to permit the next round of across-the-board spending cuts (known as “sequestration”) to take effect. If Congress fails to agree on the implementation of these cuts, then the government will shut down again.
EM: The growth story that isn’t
Richard Bernstein, December 2013
We remain very concerned about emerging-market (EM) stocks and bonds. The recent outperformance of EM stocks is again luring many investors to once again touch the hot stove. Emerging markets seem to have some significant structural and cyclical issues about which investors seem unaware or seem to be ignoring.
Portfolio Manager Viewpoints: Craig Brandon, CFA, on Municipal Floating-Rate Securities
Craig Brandon, November 2013
On August 19, 2013, Eaton Vance Floating-Rate Municipal Income Fund (the Fund) became the first floating-rate municipal income mutual fund offered to U.S. investors. By prospectus, the Fund is predominantly:
• Floating-rate: At least 80% of the Fund must be invested in municipal floating-rate obligations, consisting of municipal floating-rate bonds and “synthetic” municipal floating-rate bonds — i.e., fixed-rate municipal bonds with an interest-rate swap that swaps the fixed rate to a floating rate.
• Tax exempt: At least 80% of Fund assets must be exempt from federal income taxes.
• Investment grade: At least 75% of Fund assets must be rated investment grade at the time of investment.
A Last Minute Deal Averts Default – For Awhile
Andrew H. Friedman, October 2013
With the deadline for the United States to avoid defaulting on its debt fast approaching, Congress reached another late-night compromise to reopen the government and raise the nation’s debt limit. The deal also called for yet another bipartisan committee to try to set a budget for future government spending. Before discussing what that committee is likely to do, let’s compare the predictions I’ve been making since early this year against the reality of what ultimately occurred.
Size is a Key Potential Advantage in the Municipal Bond Market
Ralph Studley, October 2013
Individual investors and financial advisors who seek to assemble a municipal bond portfolio on their own are required to navigate a highly fragmented market and assess a myriad of macroeconomic and fundamental factors. But finding the right security is only half the battle. Although independent credit research is a vital component of the selection process, it doesn’t guarantee that an investor will trade a municipal bond at the best possible price.
The Federal Government Shuts Down: Now What Happens?
Andrew H. Friedman, October 2013
Washington insanity reached new heights yesterday as Congress failed to agree on an appropriations bill to keep the federal government running, even though it had known about the September 30 deadline for over six months. This inaction brings Washington dysfunction to a new high (or low). Up until now, Congress had arrived at each fiscal precipice and averted catastrophe with a compromise. Now, finally, Congress has gone over the edge.
The global sea change continues
Richard Bernstein, September 2013
Our long-standing theme has been that the U.S. stock market is again a growth market. Whereas investors generally still believe that the emerging markets are a growth story, the data increasingly suggest that growth is now predominantly in the developed markets. When it comes to quality, transparency and consistency of growth, the U.S. seems to stand above other markets.
5 Reasons to Consider Municipal Bonds Today
Municipal Insight Committee, September 2013
1. Tax-equivalent yields have appeared to be attractive relative to corporates
2. Munis have offered the highest yields since 2011
3. Credit quality spreads have widened
4. In recent history, long munis have rallied during periods of rising short-term interest rates
5. Muni defaults have remained at low levels
Solving the income puzzle: When traditional sources no longer complete the income picture, where’s an investor to turn?
Christopher Remington, Michael A. Cirami, Kathleen Gaffney, Scott Page; September 2013
• Income needs may be as high as they’ve ever been, while the yield potential from many traditional investment classes has dwindled to generational lows.
• Investors who remain in high-priced, low-yielding core bond strategies could experience loss of principal (and mounting retirement shortfalls) if interest rates revert toward their mean.
• We advocate creating an integrated, multi-pronged income plan that may offer yield potential that meets investor needs, while managing key risks found in the typical core fixed-income allocation.
Congress Returns from Recess to Face Fiscal Deadlines
Andrew H. Friedman, September 2013
Congress returns from its August recess facing two imminent deadlines. First, Congress has appropriated funds to keep the federal government operating only through September 30, 2013. If Congress does not appropriate additional funds during September, on October 1 the federal government will shut down. House Speaker Boehner has said he will propose short-term “stop gap” legislation without conditions that would fund the federal government for a few more months at 2013 levels. If Congress adopts such a resolution, the funding deadline will be pushed later into 2013.
Taking stock of concentrated equity positions
Eaton Vance High-Net-Worth Solutions, August 2013
Whether acquired through an employer, inheritance or some other means, many high-net-worth clients have a substantial portion of their assets concentrated in a single stock that has risen in value.
Charts for the beach
Richard Bernstein, August 2013
Our basic positions are now famous (or infamous). We continue to favor U.S. assets and to shield our portfolios from the ongoing and broad problems in the emerging markets. In the spirit of August, we forego significant text this month to present a series of charts that outline a few of the opportunities and risks we see in the global markets.
Japan – The land of the rising stock market
Richard Bernstein, August 2013
We have been ardent bulls on the Japanese stock market since last fall. Our thesis has been a simple one: For the first time in the history of our data, Japan began running consecutive monthly current account deficits.
Health Care Reform Takes Effect: What Choices Do Businesses and Individuals Have?
Andrew H. Friedman, July 2013
On January 1, 2014, four years after the date of enactment, President Obama's landmark health care reform law is scheduled to take effect. By that date, businesses and individuals must make a series of choices about their health insurance coverage.
Richard Bernstein, July 2013
If SNL’s Emily Litella worked on Wall Street, she’d probably be asking, “What’s all this hubbub about the Fed’s tapir? After all, it’s a fine animal that never hurt anyone on Wall Street.” It would then be pointed out to her that the word was “taper” and not “tapir.” She would politely end her commentary with her famous, “Never mind.”
The unloved bull market: Richard Bernstein on the U.S. equity rally
Richard Bernstein, June 2013
The U.S. equity market has seen quite a rally in 2013. Both the Dow Jones Industrial Average and the S&P 500 Index eclipsed their 2007 record closing highs in the first quarter and are up 17.4% and 16.7%, respectively, year-to-date as of May 15, 2013. Additionally, the S&P 500 has risen more than 140% from its bear market low on March 9, 2009, having done so against a slowgrowth economic backdrop.1
1 Source: Factset. The Dow Jones Industrial Average is a price-weighted average of 30 U.S. blue-chip stocks traded on the New York Stock Exchange and the NASDAQ. The S&P 500 Index is an unmanaged index of large-cap stocks commonly used as a measure of U.S. stock market performance. Index performance is historical and not indicative of future results. It is not possible to invest directly in an index.
The Real Great Rotation
Richard Bernstein, June 2013
The phrase "Great Rotation" has come to mean a sizeable shift in asset allocations from bonds to stocks. We, too, believe that stocks are likely to secularly outperform bonds, but we don’t think that is the "great rotation" about which investors should be concerned.
Is now the time for actively managed equities?
Chris Sunderland, May 2013
Like the ebb and flow of the tides, the equity market remains cyclical. Over the past five years, many riskaverse investors have responded to market gyrations and steep declines in their stock portfolios by moving in significant numbers to Treasuries and other fixed-income vehicles. High levels of cash remain on the sidelines today, earning near-zero returns. Investors who experienced a double hangover from the exploding tech bubble in the early 2000s and the 2008-2009 global credit crisis may look back on the last dozen or so years as a period defined by portfolio losses and a shared sense of misery. Only recently, as equities have rallied, have we seen investor confidence slowly returning to the stock market.
The Upcoming Debt Limit Debate: What Tax and Entitlement Changes are in Store?
Andrew H. Friedman, May 2013
The United States government has once again hit its borrowing limit. Congress had authorized the federal government to borrow $16.4 trillion and, as of the end of 2012, the government had done so. Congress subsequently extended borrowing authority through May 18, 2013.
What’s behind California’s budget improvement – and will it last?
Municipal Insight Committee, May 2013
The recent combination of an improving California economy and higher state tax rates under Proposition 30 is expected to generate additional revenues and budget surpluses, potentially allowing the state to reduce its “Wall of Debt” in the short term.