Second Quarter Outlook: Trends, Risks, And Opportunities

Caution seems to be warranted by the current low readings in the CBOE VIX Volatilty Index (VIX) as well. An extended tenure of calm in the VIX is often followed by sharp bouts of selling pressure that create new opportunities on the long side in stocks.

Turning to the bond market, the consolidation in interest rates has continued to favor a “wait and see” approach. The 10-Year Treasury Note Yield (TNX) has been wavering between 2.3% and 2.6% since December. This sideways channel has created a definable range for those who want to trade Treasuries and hopefully given pause to the “interest rates can only go up” mantra.

I’ve continued to advocate that multi-asset portfolios hold their core bond exposure as a function of diversification and risk management. Many top ETFs in this space such as the PIMCO Total Return Bond ETF (BOND) and SPDR DoubleLine Total Return Tactical ETF (TOTL) have demonstrated far less volatility than their benchmarks over the last twelve months. In my opinion, these types of actively managed ETFs are attractive alternatives to index-based funds because of their ability to control sector positioning and interest rate risk.

The Bottom Line

It’s difficult to become overly pessimistic about a market showing this level of resilience and definable trend. Nevertheless, seasoned investors know that becoming overly enthusiastic near the highs can be fraught with peril for new holdings. Taking a more disciplined approach to seeking out pockets of value or simply waiting for a better risk/reward proposition is an attractive strategy for any additional cash on the sidelines.

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