Many traders peg the success of their year to the starting point of an index that most closely resembles the market they trade.
The most commonly tracked index is the S&P 500, often referred to by its ticker SPX. Those who are more tech focused will look more at the NASDAQ. Small cap managers who try to find value in less covered, less well-known securities may be better measured through the Russell 2000. Emerging market managers commonly peg themselves to the MSCI Emerging Markets Index (MXEF in terms of the corresponding futures contract).
Bond traders might track a corporate bond index, such as the iBoxx $ Liquid Investment Grade Index. It goes under the symbol LQD in ETF form. The most commonly followed bond globally is the 10-year US Treasury. The USD is the world’s top reserve currency and the 10-year is the most popular benchmark duration.
The J.P. Morgan Government Bond Index Emerging Markets Global Core Index covers local currency emerging market debt for emerging markets managers and goes under the symbol EMLC in ETF form.
Commodity traders will measure themselves against something like the Bloomberg commodity index, which is represented by the AIGCI futures contract (and accessible through such brokers as IBKR).
For rates traders, the fed funds rate will start 2020 at 1.55 percent.
The EUR/USD, the cross between the world’s top two reserve currencies begins 2020 at 1.12. The GBP, after a year in which it was most sensitive to Brexit’s impact on the UK’s future capital flows and balance of payments, will start at around 1.326 to the US dollar. The USD/JPY will begin at around 109.
Yields on assets going into 2020
Below, we can find the returns between the most conservative investment (cash, in this case, in USD) through the riskiest of all public asset classes taken collectively (CCC or lower credit). To the right of the CCC or lower column in the graph shows the risk premiums (“RP”) between various asset classes or the expected return differential over one year.
These are done for USD assets, though this process of looking at (or backing out) the discounted future can be done for all countries that have developed capital markets. It’s simply done by looking at the yield on cash, followed by the yields on various types of bonds, and the “yield” on stocks.
Equities don’t have a yield, per se, as their cash flows are theoretically perpetual. Accordingly, a common proxy for the yield on stocks is the forward one-year earnings yield. This can be found by either forecasting earnings top-down (building macroeconomic indicators and how they translate into earnings for the particular index) or bottom-up by going by each individual company in the index and its weighting. Since the forward P/E of US stocks is around 19 to start the year, this means that about 19 years of earnings would expect you to earn the equivalent to the principal amount invested. One over that number is the forward one-year yield. If 19, that comes to 5.2 to 5.3 percent.
The relatively tight spreads make for a more challenging environment for investors going forward. 5.3 percent return on equities (most people’s favorite asset class) is only one-third of what annualized returns have been this cycle – i.e., since the 2009 bottom – and only one-half what they have averaged over the past half-century.
Cash is only yielding 1.55 percent. That puts real rates on cash – i.e., inflation-adjusted rates – negative with inflation averaging about 2 percent. The 10-year isn’t much better and comes with duration risk, meaning the price movement is much more susceptible to changes in interest rates.
The 30-year gives just 2.39 percent. That means just a 9-bp move (0.09 percent – 2.39 divided by its effective duration of about 25-26) in interest rates would effectively offset its entire annual yield.
Of course, as bond investors in Europe and Japan know, their yields are already zero and in many cases negative. On top of that, many of those markets aren’t particularly liquid (many bond issuances don’t trade all day), unlike the US Treasuries market, which is the largest and most liquid bond market in the world.
When you get into corporate credit, you’re dealing with potential defaults, which isn’t much of an expected issue with developed market sovereign credit. The bottom tier of BBB gives only barely over 3 percent. The beginning of BB – high yield or “junk grade” – gives not even 4 percent.
CCC bonds are the riskiest. They tend to trade with a high correlation at the beginning of the business cycle as all companies tend to recover as economic prospects improve and lending conditions turn up. But at the latter part of cycles, more company-specific credit research is typically required. Currently, the worst forms of credit are dominated by energy companies and brick-and-mortar retail.
2020 starting reference points for various asset classes
Below is a range of starting reference points for a variety of assets as 2020 opens.
- S&P 500: 3,231
- NASDAQ: 8,973
- Dow Jones Industrial Average (DJIA): 28,538
- Russell 2000: 1,668
- FTSE 100: 7,542
- DAX: 13,249
- CAC 40: 5,978
- Stoxx 600: 416
- FTSE MIB: 23,506
- Nikkei 225: 23,656
- Hang Seng: 28,189
- Shanghai: 3,050
- BSE Sensex: 41,254
Bonds and Rates
- Fed funds rate: 1.55 percent
- US 2-year: 1.58 percent
- US 5-year: 1.69 percent
- US 10-year: 1.92 percent
- US 30-year: 2.39 percent
- German 10-year: minus-0.19 percent
- Japan 10-year: minus-0.02 percent
- UK 10-year: 0.83 percent
- Australia 10-year: 1.39 percent
- Canada 10-year: 1.71 percent
- China 10-year: 3.18 percent
- Italy 10-year: 1.42 percent
- Spain 10-year: 0.47 percent
- EMLC (local currency EM debt ETF): $34.01
- USD AAA yield: 2.53 percent
- USD BBB yield: 3.16 percent
- USD BB yield: 3.74 percent
- USD B yield: 5.32 percent
- USD CCC yield: 11.62 percent
- US equities FTM earnings yield: 5.26 percent
Currencies / FX
- EUR/USD: 1.122
- USD/JPY: 108.67
- GBP/USD: 1.3264
- USD/CHF: 0.9673
- Dollar Index: 96.51
- WTI crude oil: 61.21
- Brent crude oil: 66.03
- Gold: 1,520
- Silver: 17.90
Cryptocurrencies (in USD)
- Bitcoin: $7,181
- Ethereum: $128
- Ripple: $0.19
- Bitcoin cash: $203.70
- Litecoin: $41.19
- Monero: $44.60