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.
*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.
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 May was 5x 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 is likely to increase.
*The yield ratio is calculated by dividing the Yield to Maturity of the High Yield Index by the Investment Grade Index.
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 62% 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.
*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
Valuations Around the World
As a reference, we provide valuation measures for various domestic and international indexes. The valuation range dates back to 1995.
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.
*Normalization adjusts or rescales the values of different time series to a notionally common scale to allow for comparability.
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.
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