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Economy & Markets Insights

By Richard "Crit" Thomas, CFA, CAIA
Economy & Markets
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In this section, we include charts and concepts that are not necessarily thematic in nature and may, at times, even be in contrast to our own views. Some of these charts are sourced from our sub-advisors who allow for differentiated insight into a variety of asset classes on a global scale. Others, we have sourced ourselves as we find them compelling and may reflect views that are somewhat unique and may not be emphasized by the financial media.

Historical Returns and Volatility for Various Asset Classes

Asset Class Returns
As of November 2020

Asset Class Returns

Source: Bloomberg
*Volatility is measured by the annualized standard deviation of monthly returns over 20 years.

Fixed Income Returns and Characteristics

Fixed Income Returns
As of November 2020

Fixed Income Returns

Fixed Income Characteristics
As of November 2020

Fixed Income Characteristics

Source: Bloomberg
*Volatility is measured by the annualized standard deviation of monthly returns over 20 years.
**Change in Price = Duration effect + Convexity effect ≈ (-Duration * Change in Yield) + (1/2 Convexity * (Change in Yield))

Why Don’t We Time the Market?

Why is market timing so hard? Maybe it is because the majority of the return in a bull market* straddles a bear market. Market timers risk sacrificing the most beneficial portions of a bull market even if they slightly misjudge the market peak and trough.

S&P 500 Index Bull Market Total Return Allocation by Quartile Since 1935

*Our definition of a bull market is met when the market has produced a minimum return of 40% from the trough and is sustained for at least 6 months.
Source: Bloomberg

The Search for Yield

Near record low yields for investment grade securities, record fiscal and monetary stimulus, and economic recovery will all conspire to force investors to take on additional credit risk over the course of the next cycle. The yield on the Bloomberg Barclays U.S. Corporate Bond High Yield Index (High Yield) at the end of November was 4x higher than the yield on the Bloomberg Barclays U.S. Aggregate Bond Index (Investment Grade). That said, we suggest a selective approach to adding credit risk as default risk remains high for some issuers.

Yield to Maturity

*The yield ratio is calculated by dividing the Yield to Maturity of the High Yield Index by the Investment Grade Index.
Source: Bloomberg Barclays

Active Versus Passive

Note the cyclical nature of active and passive strategy returns over time. Recently, trailing five-year return observations for the S&P 500® ranked above 66% of active large-cap managers (on a gross return basis; it would be even higher net of fees). Yet note how the S&P 500® Index tended to rank higher than active funds during periods of high absolute returns. Our research suggests that absolute returns over the next five years may be more muted due to lower earnings growth and current high valuations. Now may be a good time to consider more active exposure.

S&P 500 vs. Active Domestic Large Cap Funds

*Includes all non-index large cap mutual funds, including funds that have been liquidated or merged out of existence.
Returns are gross of fees.
Sources: Morningstar Direct, S&P Dow Jones Indexes

The following charts consider active management from two different aspects. While the S&P 500® has outperformed the MSCI EAFE® and Emerging Market Indexes over the last cycle, international stocks still represent a healthy hunting ground for active managers given the consistently high representation in the top 100 performing stocks.

The weight of the top 10 stocks in the S&P 500® reached a new high in September, representing 33% of the Index’s market cap. Historically high concentration in the S&P 500® Index suggest a less diversified portfolio in a historical context. This observation is supported by the diversification ratio, which indicates that the U.S. stock index is the least diversified since the dot com boom. It also means that a very small number of stocks are having an outsized influence on index returns and valuation. There may be better valuations and return opportunity in the other 490 stocks in the Index.

Price to Trailing 10-Year EPS

*For the following indexes: S&P 500®, MSCI EAFE®, MSCI Emerging Markets, the top 100 represents the stocks with the
highest total return in each year.

Source: Bloomberg

Valuations Around the World

As a reference, we provide valuation measures for various domestic and international indexes. The valuation range dates back to 1995.

Russell Midcap Index/S&P 500 Index

Sources: Bloomberg, MSCI, S&P, Dow Jones Indexes

Closing the Mid-Cap Gap

What happened to the gap? In the past we have pointed to the growing gap between relative earnings and prices for mid caps versus large caps. Mid cap stock prices had stopped rising along with relative earnings during the expansion. The earnings are forward looking through the end of the year. The most recent observations reflect the cyclicality of mid caps versus large caps in a downturn. Yet that would suggest a cyclical bounce back as the economy recovers, which is what we anticipate, bringing relative performance with it.

Russell Midcap Index S&P 500 Index

*Normalization adjusts or rescales the values of different time series to a notionally common scale to allow for comparability.
Source: Bloomberg

Glossary of Investment Terms and Index Definitions


This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security. There is no guarantee that the information is complete or timely. Past performance is no guarantee of future results. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Please visit touchstoneinvestments.com for performance information current to the most recent month-end.

Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.

Touchstone Funds are distributed by Touchstone Securities, Inc.*
*A registered broker-dealer and member FINRA/SIPC.

Not FDIC Insured | No Bank Guarantee | May Lose Value

crit thomas global market strategist

Richard "Crit" Thomas, CFA, CAIA

Global Market Strategist
Crit is responsible for examining and evaluating economic conditions, generating insights and providing a sharpened perspective on investment strategies for enriched portfolio construction.

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