Perspectives

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 ...

Getting to your Goal

As of this writing, the S&P 500 has gone 1,302 days without a correction of 10% or greater, the second longest run since World War II.  As far as the untrained eye can see, risk appears to have disappeared from markets.  The performance of the S&P 500 seems to dominate investors’ perception of prevailing risk in the market, despite explosive risk events in certain other asset classes - May and June 2013 saw the worst bond market rout in generations, certain commodity and resource assets lost more than half their value in 2014, and on October 15th ...

An Advance in Portfolio Construction

Larry Cao, of the CFA Institute, writes that risk factor diversification - like that used at Rain Capital - is one of the most important advances in portfolio construction techniques in recent decades and is increasingly used by sophisticated institutional investors.  According to Cao, asset classes are simply too correlated with each other for traditional asset allocation to add much to portfolio diversification anymore. Continue reading to see why he thinks risk factor allocation is the most effective approach to diversification:

An Advance in Portfolio Construction

 

 

 

 

Accounting for Inflation

The inflation conundrum dogging the US economy right now has a lot of observers scratching their heads.  The economy clocked 5% real GDP growth in Q3:2014 and an estimated 2.6% in Q4.  Unemployment at 5.6% is at levels that have historically begun to generate wage inflation, but there is little to speak of.  Explanations range from labor market slack to deflationary pressures from abroad, but economists at the Fed are pointing markets to a simpler answer:  zero interest rate policy. 

According to Federal Reserve researchers[1], a basic accounting identity is likely at the root of the ...