Dissecting the Wall of Worry

  • Equity-market volatility hit an all-time low in Q3
  • Low volatility and strong equity markets were likely the result of improved economic fundamentals during the period
  • On the other hand, policy uncertainty, stretched valuations, excessive risk taking and a slight increase in medium-term recession risk warrant more targeted risk taking in portfolios


What does volatility tell us about market risk? If there was ever a quarter to ask that question, it was in Q3 when the CBOE Volatility Index (VIX) hit an all-time low of 8.84. During the same period, the US experienced three major hurricanes, political turmoil, serious doubts ...

Bye, Bye Backstop

  • Trump’s agenda of regulatory rollback, infrastructure spending and tax cuts is all but stuck in Washington’s ideologically fractured environment
  • Strong earnings made up for stalled policy and a lack of improvement on the economic front, with reported earnings for the S&P 500 up nearly 14%
  • The Fed may be moving from a focus on financial stability to one of monetary stability, which has important implications for risk taking
  • In the meantime, valuations remain stretched across a number of different asset classes

In Q2, the economic and political situation in the US began to feel a bit stuck ...

Tough Transition

  • The so-called “Trump Trade” began to lose steam toward the end of Q1 as it became clear that single-party control in Washington wouldn’t necessarily translate into quick results
  • Events abroad in Afghanistan, Syria and North Korea also took the President’s attention away from his aggressive domestic agenda
  • The Fed continued to hike rates during the quarter and shifted its tone from one of patience to one that is markedly more aggressive
  • Comparisons between our current economy and political situation to those of the early 1980s are not supported by the data


In Q1, President Trump began an unusually ...

Hard Reset

Markets had a hard reset in Q4 with the election of Donald Trump on November 8th.  Initially global equity markets plunged, but within hours began to recover and rallied strongly throughout the quarter, mostly on speculation that the new president would usher in tax cuts, deregulation and a sweeping fiscal spending program.  Coupled with strong economic data and another hike from the Fed in mid-December, bonds were left in the dust during the quarter reminding investors that old rules of diversification are flawed.  To paraphrase one of our managers, “it’s counterintuitive to suggest that, if one aims to ...

Policy Uncertainty

  • In the wake of “Brexit,” central banks reasserted themselves over markets in a big way in Q3, sending bond yields to historic lows.
  • The recent wave of populism in the developed world is targeting institutions that have been supportive of capital markets for the better part of 70 years.  To the extent these political movements prevail, they would likely carry negative economic consequences.
  • Ultra-low interest rates are increasingly being blamed for contributing to the anemic growth and wealth inequality that may be fueling these populist sentiments, further limiting the Fed’s policy options.
  • Rain portfolios remain positioned at the cautious ...

Mixed Messages

  • Events in Q1 took the Fed off message and “Brexit” further complicated its story
  • Given the limited set of policy tools, the Fed seems to want to play it safe and is reluctant to raise rates until it has strong evidence of inflationary pressures
  • The safe road now means more policy uncertainty later
  • Markets will hinge, in part, on whether the Fed dramatically changes the exit framework it has spelled out so well in recent years

Market Update

Last quarter, we wrote that negative interest rate policy in Japan and Europe signaled a sense of desperation on the part of ...

The Limits of Divergence?


  • The smooth December lift-off in rates was derailed in January by a rolling set of concerns that culminated in markets pricing in (at least for now) a more gradual pace of interest rate tightening than previously expected.


  • Negative interest rate policy out of Japan in late January gave markets a taste of just how divergent global monetary policies are today and may have signaled that foreign central banks are approaching the limits of their policy tools.


  • Credit markets were particularly stressed during the quarter, driven largely by the energy sector, and liquidity became scarce in substantial parts of the high ...

Mind the potholes

  • The Central Bank divergence story – the idea that instability in capital markets would be driven by diverging monetary policy among the world’s largest economies - is alive and well but evolving, with more pain in store for interest-rate sensitive investments
  • Correlations between traditional asset classes increased in 2015, making traditional asset allocation an unreliable way to achieve diversification
  • Recent volatility may be attributable in part to rebalancing by traditional portfolio managers away from risk assets because of the lack of portfolio safety that bonds demonstrated in 2015
  • Rain portfolios experienced less volatility than their respective benchmarks due to a tilt ...