Newsletter dated December 2, 2016

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The major U.S. stock indexes have continued their post-election rally and reached new record highs. The Standard & Poor’s 500 index passed 2’200, the Dow Jones Industrials went above 19’000.

At the same time US interest rates jumped. See yield for 10-year US government bonds in our chart of the day! Since mid-year the yield has increased from 1.5% to 2.4%. Some investors already wonder if this move might be the beginning of a turn-around from the 30-year down trend of interest rates.

Calling an end to the three-decade bond bull market is no longer looking like unthinkable. The Federal Reserve is expected to start raising interest rates and inflationary expectations are climbing.

In the face of Donald Trump’s election win – with promises of tax cuts and $1 trillion in infrastructure spending – many bond investors are reevaluating their asset allocation and switch from bonds to stocks.

More inflationary pressure should arise from increasing commodity and energy prices. The Organization of the Petroleum Exporting Countries (OPEC) surprised the world by agreeing to its first production cut in eight years. After a harmonious meeting in Vienna Oil prices jumped 10 percent. Saudi Arabia and Iran came to an agreement. And even Russia is working with OPEC together after nearly doubling its crude oil output over the last 20 years! Overall this can be considers a remarkable revival if  OPEC considers being dead for several years. The OPEC and Russia account for about half of the global crude oil production.

How do we invest in this situation? For the switch from bonds to stock we do not have to worry so much as long we are invested in structured products combining the advantages from both worlds. In general we can benefit from a higher yield and volatility level. In particular we are continuously researching all kind of market opportunities. Currently we are holding a significant amount of crude oil related investments.