Markets Hover Near Record Levels, But Risks Remain | ETF Trends

By DeFred Folts III, Managing Partner, Chief Investment Strategist, and Eric Biegeleisen, CFA, Managing Director, Research Portfolio Manager


    • U.S. Equities: Major U.S. equity market indices continue to reach all-time highs as well as record levels of overvaluation by our measure. However, even at elevated valuations, monetary and fiscal stimulus remains supportive. In addition, high-yield credit spreads continue to tighten even further. Our research model is indicating that a potential regime shift in the global capital markets could be underway. This is supported by an increasing focus on fiscal (government) spending and an increase in readings of inflation in many areas of the economy. Should such a regime shift continue there could be an additional rotation out of U.S. large-cap, high growth equities that have outperformed over the last several years and towards more cyclical U.S. value companies that are more closely tied to the growth of the real economy.
    • Japanese equities continue to be the most attractive equity asset class in our model research. Japan equities benefit from a more favorable valuation measure than other equity markets, a continued narrowing of high-yield credit spreads, a steepening yield curve and sustained monetary stimulus from the Bank of Japan.
  • European Equities: European companies should continue to benefit from the sustained and extraordinary  monetary and fiscal stimulus required to support the region because of a slower recovery from the coronavirus pandemic and inconsistent progress on vaccinations. Also, should the U.S. dollar resume its strengthening relative to the Euro, European equities could benefit since a material percentage of companies based in Europe export their products worldwide. Lower local exchange rates can help exporters either expand market share and / or profit margins due to the price advantages a lower exchange rate provides.
  • Emerging Market Equities: While the region still exhibits positive economics, it remains somewhat overvalued and our measure of investor psychology for the region has softened. Should increasing levels of inflation in the U.S. persist, this could prove to be a headwind for EM equities, offsetting the positive impact of a steepening U.S. yield curve and negatively impacting the attractiveness of EM equities. However, emerging market countries and
    their equity markets could benefit from U.S. fiscal stimulus measures given the degree to which the U.S. imports from emerging market countries.

Real Assets:

  • While gold struggled in Q1 2021, it continues to be supported by negative real (nominal rates minus inflation expectations) interest rates. During the first quarter, negative real rates climbed from around -110 bps to -60 bps. However, more recently they have retreated into the negative 80 bps range – a positive for Gold. Gold may also benefit from the recent fiscal stimulus package that was passed which could raise the prospects of future inflation in consumer prices, especially if the Fed also acts to further repress longterm bond yields. Gold is an asset class than can serve as a critical portfolio hedge against the prospects of future central bank money printing and  financial repression over the longer term.
  • Commodities remain attractive due to the longstanding relative undervaluation of real assets and the prospect of a continued strong global economic recovery for the remainder of 2021. Other factors positively impacting real assets include: appreciation of the Chinese yuan, narrowing high-yield credit spreads, a steepening of U.S. and global yield curve measures and positive price momentum. If the U.S. dollar were to strengthen, it could present a risk for the commodities outlook.

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The primary investment vehicles utilized in portfolio construction are index Exchange Traded Funds (ETFs). The investment research process is driven by the firm’s proprietary global capital markets model. The model is stress-tested over 150 years of market history and translates decades of research and investment experience into a system of causal rules and algorithms to describe global capital market behavior. 3EDGE offers a full suite of solutions, each with a target rate of return and risk parameters, to meet investors’ different objectives.

DISCLOSURES: This commentary and analysis is intended for information purposes only and is as of April 2, 2021. This commentary does not constitute an offer to sell or solicitation of an offer to buy any securities. The opinions expressed in View From the EDGE® are those of Mr. Folts and Mr. Biegeleisen and are subject to change without notice in reaction to shifting market conditions. This commentary is not intended to provide personal investment advice and does not take into account the unique investment objectives and financial situation of the reader. Investors should only seek investment advice from their individual financial adviser. These observations include information from sources 3EDGE believes to be reliable, but the accuracy of such information cannot be guaranteed. Investments including common stocks, fixed income, commodities, ETNs and ETFs involve the risk of loss that investors should be prepared to bear. Investment in the 3EDGE investment strategies entails substantial risks and there can be no assurance that the strategies’ investment objectives will be achieved. Real Assets (Gold & Commodities) includes precious metals such as gold as well as investments that operate and derive much of their revenue in real assets, e.g., MLPs, metals and mining corporations, etc. Intermediate-Term Fixed Income includes fixed income funds with an average duration of greater than 2 years and less than 10 years. Short-Term Fixed Income and Cash includes cash, cash equivalents, money market funds, and fixed income funds with an average duration of 2 years or less. Past performance may not be indicative of future results.

The Risk Number®, a proprietary scaled index developed by Riskalyze to quantify the risk of a portfolio, is calculated based on downside risk on a scale from 1- 99. The greater the potential loss, the greater the number. The Risk Number® includes analysis and proprietary information of Riskalyze. As of 3/31/21. Further information available at

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