Investor Intelligence November 10, 2017


Investor Intelligence

A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser)                                                      November 10, 2017

myrnaIA                                                                                                                                                                  Myrna Rivera, CIMA®

From the Executive Desk                                                                         Founder & Chief Executive Officer

The unusually low levels of stock market volatility are unsettling to some industry analysts and policy makers. Back in June, the Federal Open Market Committee had voiced concerns indicating that “…subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.” In a recent New York Fed article entitled “The Low Volatility Puzzle: Are Investors Complacent?”, analysts found mixed support for investor complacency. On the one hand, they found that historical volatility might have been abnormally high, rather than current volatility being abnormally low. On the other hand, they did found that estimates of the volatility risk premium had been somewhat low, which is consistent with the view that investor risk tolerance has increased.
No matter how you measure it, volatility has reached historical lows. By September the standard deviation of S&P 500 daily returns had been 0.45%, the lowest level since 1965. As the chart below confirms, the Chicago Board Options Exchange Volatility Index (VIX), which is a market-based measure of implied volatility, showed values around 9-10 percent in October after hovering near all-time lows for much of 2017. This despite a backdrop of high political uncertainty, as measured by Baker, Bloom, and Davis’s Based on similarities with the low volatility environment before the financial crisis, some suggest that investor complacency may contribute to a major correction in equity markets. While this sounds like a reasonable warning, it is based on historical patterns which may have changed after the financial crisis.
To assess today’s low levels of volatility further it is useful to think about the fundamental sources of stock market volatility. According to asset pricing theory, stock prices should equal the expected value of discounted dividends. As a result, stock price volatility should follow dividend volatility. However, historical data shows that stock prices have exhibited significantly higher volatility since the 1950s, to the tune of 10 percentage points on average. Nobel laurate Robert Shiller has interpreted these results as evidence of stock market inefficiency, which show the strong effect investor sentiment can have on stock prices. Hence today’s low levels of volatility could be interpreted as “normal” and in line with a more complacent investor, or the result of stock prices inching closer to dividend volatility, which according to theoretical fundamentals should be the same. Bearing down on this phenomenon is the current debate on the impact increasing ETF trading is having on the stock markets, but this is a topic best left for another day.

Edmundo J. GarzaEdmundoIA

Economic Perspectives                                                                                                               President

When Janet Yellen’s term expires in February 2018, the U.S. central bank will have a new Chairman; current Federal Reserve Governor Jerome Powell. According to Reuters, Powell, who has been a Fed governor since 2012, has yet to cast a vote against the Federal Open Market Committee’s decisions on monetary policy. His views have been in line with the Fed Chair, so the appointment offers investors more certainty on the Fed’s projected policy path. Showing his like-mindedness with the FOMC, Powell said in a speech in June that if the economy performs about as expected, he would view it as appropriate to continue to gradually raise rates. Powell has also endorsed the committee’s plan to gradually shrink the $4.5 trillion balance sheet. While he had voiced some skepticism of the third round of quantitative easing launched in 2012, he ended up voting for the initiative championed by then – Chairman Ben Bernanke. Powell has also been a supporter of Dodd-Frank reforms following the 2007-2009 recession, and he has stayed open to reforms that lessen the burden on the financial industry. This combination of views may have provided the best fit with the President’s own opinions. Some believe that his pragmatist approach and reputation as a centrist on monetary policy also sits well with financial leaders in the Trump administration. Not all will be rosy under Powell. The dollar could see further weakening, and bond prices and lower yields might be boosted as interest rate hikes continue a conservative path. A lawyer by training, Powell served at the Treasury Department under President George H.W. Bush. He has been the point person at the Board of Governors in overseeing financial payment systems, and built his fortunes in the private sector working at Dillon Read & Co. investment banking and the Carlyle Group, a well-known private equity firm.


(As of November 10, 2017)

United States:

CPI: 2.0% Chg. from yr. ago
Unemployment Rate: 4.1%
GDP: 3.0% Comp. Annual Rate of Chg. on 2017:Q3
Ind. Prod. Index: 0.9% change from previous month

Source: St. Louis Fed. Res. 


CPI: 1.4% Chg. from yr. ago
Unemployment Rate: 8.9%
GDP: 0.6%, Comp. Annual Rate of Chg. on 2017:Q2
Ind. Prod. Index: -0.6% change from previous month

Source: Moody’s Analytics 


CPI: 0.7% Chg. from yr. ago
Unemployment Rate: 2.8%
GDP: 0.3%, Comp. Annual Rate of Chg. on 2017:Q3
Ind. Prod. Index: -1.1% change from previous month

Source: Moody’s Analytics 

Puerto Rico (As of October 23):

CPI: 0.2% Chg. from yr. ago
Unemployment Rate: 10.1%
Payroll Employment: -1.2% Chg. from yr. ago
GDB Econ. Act. Index: -2.1% Chg. from yr. ago

Source: P.R. GDB 

EvangelineIAEvangeline Dávila, CIMA®

Market Update                                                                                         Chief Research & Investment Officer

Stocks:        In the U.S, the S&P 500 Index gained 2.2% in October, while the Dow Jones rose 4.3%. The two indexes notched their 7th straight monthly gain. More than half of the S&P 500’s gains came from just five stocks: Facebook, Amazon, Apple, Google and Microsoft. These stocks also helped lift the Nasdaq composite 3.6% in October. Non-U.S. markets continued to be bolstered by expectations of growing economies. The MSCI EAFE index returned 1.5% during October, while the MSCI Emerging Markets index returned 3.5%.

Bonds:         U.S. bond prices, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, were flat for the month. Investor expectations for improving economic conditions led them to favor stocks and corporate debt over government bonds. This triggered the 10- year U.S. Treasury yield to rise to 2.38% from 2.33% a month ago (bond yields move in the opposite direction of prices). Investors continue to expect a December interest rate hike by the Federal Reserve.

Alternatives: Global commodity prices continued to rally in October. Base metals were again the base driver. Energy prices declined due to sharp falls for coking and thermal coal as well as for ethanol. Oil prices continued to climb in October as signs that the global oil glut finally easing are boosting sentiment. Nevertheless, sentiment could quickly change course if shale producers in the U.S. begin to expand production.

Eileen RiveraEileenIA

The Advisor’s Corner                                            Due Diligence Officer Investment Adviser

According to a recent Wall Street Journal breakfast briefing report, S&P Dow Jones Indices and MSCI Inc., whose indexes are tracked by trillions of dollars held in exchange-traded funds, rolled out a series of planned changes to their company sector groupings this week. That will impact where companies are grouped within benchmarks like the S&P 500, and could alter what stocks are held in certain industry-focused ETFs. The latest shifts reflect the way the corporate landscape has changed in recent years. Foremost, the index will update the telecommunications sector, which now looks like a relic of a past era. The telecom sector made up 9.8% of the S&P 500 in 1989, but has shrunk to a 1.8% weighting, according to S&P Dow Jones Indices. After a long period of consolidation, it holds just three companies. The telecom sector will be broadened to encompass communications. That means creating a new media and entertainment industry group within it that will inherit the media companies currently classified in the consumer discretionary sector. After the change, the current telecom stocks will be side-by-side with the likes of advertising, publishing and interactive media firms. Other changes include reclassifying internet retail, a sub-industry within the consumer discretionary sector, while absorbing some e-commerce companies that are currently in the tech sector. Also, the internet & software and services sub-industry in tech will be discontinued, and a new tech sub-industry called internet services and infrastructure will be created in its place. More guidance is expected in January and the changes will go into effect next September.

What to Do?

Global markets continued a healthy growth trend during October. However, the ever-changing macroeconomic environment, domestic policy stagnation, and U.S. - foreign relations continue to keep us watchful of developments and effects till the end of the year. Amid an uncertain scenario we continue to recommend prudent asset allocation and risk assessment, based on future capital needs, for plan sponsors, institutions and individual investors. Due diligence reviews and an adherence to a well-developed investment policy remain the most prudent course for long-term investors. Continued fiduciary education is paramount. 


Consultiva Internacional Inc. (Consultiva) is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. Consultiva has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.



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