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Market Recap Friday, April 28th

Global stock markets rallied after a centrist candidate won the first round of France’s presidential election. French stocks and the euro both gained after Emmanuel Macron, above, and Marine Le Pen advanced in the French Presidential election. Other risky assets, such as emerging-markets currencies and junk bonds, also rallied. The U.K. economy is showing some signs that the Brexit drag is still ahead of us, and the snap election is scheduled for June 8th. However, general risk from Europe has faded with Macron in the lead in the French election. The global story generally remains one of a synchronized recovery. With inflation rising modestly as oil prices stabilized relative to the low of $26 in 2016, and China growth has reaccelerated. Nominal growth, which is supporting corporate earnings, remains the bridge in 2017 to get to U.S. fiscal stimulus. There remain some risks, but the synchronized nature of global growth, combined with still-easy policy in many areas is helping risk assets look past many of these items. The CBOE Volatility Index, or VIX, a measure of anticipated stock-market volatility sometimes called the “fear gauge,” dropped 26%—its largest one-day fall since 2011. Bank shares rallied around the world.

Nasdaq Composite Tops 6000 for First Time

The Nasdaq Composite raced past 6000, the latest sign that technology companies have become a driving force in the recent stock-market rally. The index hit the milestone 17 years after it reached 5000 during the dot-com era, in a broad rally April 20 that was turbocharged by earnings from bellwether companies, those market leaders in the respective sectors. Surging technology shares have helped the index outperform its peers so far this year. The top five contributors to the Nasdaq’s 2017 gains, Apple Inc., Facebook Inc., Inc., Microsoft Corp., and Alphabet Inc.

French Vote Fuels Hopes for Growth

Mr. Macron won the first round with 24% of the vote, ahead of Ms. Le Pen with 21.3%. The ascension of centrist Emmanuel Macron as the heavy favorite in France’s presidential race spurred investors to set aside the political worries that have long plagued European markets and to make new bets on economic growth. Mr. Macron is now seen as the leader in May 7’s runoff against second-place finisher Marine Le Pen, whose pledge to dismantle the euro had damped prices of euro assets and the common currency itself. The former investment banker’s good showing sent stocks and the euro sharply higher while triggering a sharp selloff in German government bonds, which investors had bought as a haven from populist politicians such as Ms. Le Pen.

Thought: Managed Futures Strategy in an Uncertain World

Managed futures strategies, also known as trend-following or momentum strategies, seek to generate attractive returns by capturing price trends across major asset classes, have been around since the 1980s. Historically, investors have been drawn to these strategies mainly for their diversification benefits and their potential for equity-like returns. Because of their low-to-negative correlation with many risk assets, managed futures funds may help to lower overall portfolio volatility and contain drawdowns. Ideally, managed future funds should demonstrate their best performance during equity sell-offs, when investors need returns the most. In choppier markets without clear trends, performance may be down or muted.

With low annual returns expected for mainstream stocks and bonds over the next decade, and asset prices in both the equity and bond markets near all-time highs, investors are looking to alternative strategies for return and diversification potential. As such, investors have been allocating to managed futures strategies, which offer the potential for both. Trend-following, the primary approach used in managed futures strategies, has generally delivered strong returns over multiple decades.

Managed futures strategies are all designed differently so there is considerable disparity among these funds. Trend horizons, portfolio construction and risk management criteria are three main factors that determine the nature of a managed futures fund. As impactful as managed futures strategies can be, their impact on the overall portfolio depends on the size of the allocation. Many investors incorporate managed futures into their overall alternatives allocation, which can often range from 10% to 30% depending on the investment objectives and the role of managed futures in the portfolio.


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