ECONOMICS & INVESTING
Although none of our investment systems directly incorporate fundamental data, we enjoy contemplating the fundamental narratives reflected in the price trends our systems ultimately find attractive. Our systems are currently quite leery of equity or other risk assets, as we now sit firmly in a bear market induced by the widespread economic halt caused by COVID-19.
Recently a reader asked us to explain “the recent Repo Market Fiasco and the Fed’s intervention,” as well as the consequences and outcomes. For those of you who regularly read our blog, we first included a chart on this subject on September 23, 2019. The answer is fairly technical, but let’s focus on some charts to show the enormity of the issue first.
I write this letter with the utmost gratitude and respect. You see, unlike your predecessors, this time you and your Committee acted quickly, decisively and appropriately to a rapidly evolving political and macro-economic world. It is hard to contemplate what Congress has charged the Federal Open Market Committee (FOMC), and you, to do.
Most investment professionals would agree that stock market price movement in the 0-5% range is just ordinary market movement or statistical “noise”.
What is volatility? From a purely technical standpoint, volatility, otherwise known as standard deviation, is a statistical measure of data’s dispersion around its mean. In more simple terms, volatility is a way to measure swings in the price of securities or market indices. But what does that tell us as investors?
For decades most financial plans were created with withdrawal rates of 4 to 5% to meet clients’ living needs. Yet today, the 10-year U.S. Treasury yield is hovering around 1.5% and even the 30-year has a ~2% yield. Worse yet, yields on equities have also trended lower with the dividend yield of the S&P 500® Index also around 2%. Today, almost $20 trillion of international bonds have negative yields!
What is risk? How do you measure it? In investing, risk can mean a lot of things to a lot of people. Industry professionals would typically answer volatility (VIX), standard deviation, Sharpe ratio, beta, and the list goes on. While those are technically correct, as money managers, we have to think like investors. What does “risk” mean to them?
Who defines the world of finance and economics today? Between the market-trend tweeters (do people still talk about Bitcoin?), hedge fund managers, the on-air entertainment reporters on CNBC, and stock-picker bloggers, there is no shortage of people to keep track of in the industry.
Factor investing has become one of the fastest growing investment approaches in asset management, experiencing 11% organic asset growth per year since 20111. However, factor investing is certainly not new, and while the factor investing landscape may be evolving and gaining popularity, asset managers have been using this approach for over half a century.
As we frequently like to point out, no one knows what will happen to the markets or the economy over the short term. Not tomorrow, next week, next quarter or even next year. But we do need to face reality. The bull market that we have enjoyed since 2009 is the longest in history.