CALDEIRÃO DE BOLSA

Here are the main points:

* NDR remains bullish on stocks and bearish on the outlook for bonds. Their favorite global sectors are found in the emerging markets, where they like the combination of strong growth and attractive valuations

* That said, they expect sluggish economic growth. Unemployment, unfortunately, is expected to remain high for a number of years to come due to a number of factors

* They are also not optimistic on the outlook for housing, since house prices and unemployment rates are inversely correlated

* Although they are not excited about the outlook for bonds, they are not abandoning the sector. They noted that with yields so low, and investor desire for safety still high, bonds could continue to at least hold their value. They continue to like corporate bonds, but are less excited about mortgage-backed securities.

NDR does not have any strong views on the yield curve, noting that only the 30-year sector seems to offer value albeit with considerably more principal risk
* Within the US equity markets, their favorite sectors are consumer staples; industrials; and materials. They remain underweight health care and telecommunications.

The points above should be familiar if you’ve been paying attention to other well known strategists like Jeremy Grantham and James Montier.

Specifically, Grantham’s reluctant allocation towards emerging markets (with the caveat that they could develop into bubbles within a few years) and his warning against bonds which are extremely expensive. This is also something that I’ve written about more than a few times: Why Today’s Bond Investors Will Be Disappointed.

Finally, NDR pointed out that this market is providing little opportunity for stock picking skills as the median correlation of stock returns is at an all time record high. According to Ned Davis Research, the median correlation for stocks is 0.82 - confirming the data from Birinyi Associates.

The causes of this peak in correlation are often cited as being due to the increasing use of structured products like ETFs (many with double, triple or even quadruple exposure), the non-participation of retail investors which has left the field occupied mainly by institutional investors, hedge funds and finally, quant firms that rely on high frequency trading strategies that buy and sell vast amounts of stocks in milliseconds.

But when you look through market history, it is obvious that there is a natural ebb and flow to correlation among stocks. At times they become a herd and at other times rugged individualists. I don’t think that the structural changes outlined above can fully explain what we are seeing. Rather, I suspect that it is a reflection of sentiment or “animal spirits” and as that changes, so will correlation revert to historical trend.

Of course, portfolio managers hate to hear that correlation is so high because basically it means that they provide no value. That may be a bitter pill to swallow but keep in mind that this is temporary. But until this characteristic changes, this is a binary market. You are either in or out.