In the November issue of our monthly flagship publication, we feature:
- On the Record by Chief Investment Officer Tony Roth, where he puts into perspective the current market volatility and discusses what the impending midterm elections could mean for the economy, policies, and portfolios
- In Focus by Head of Fixed Income Dominic D’Eramo looks at investing in today’s rising rate environment, and examines the anatomy of rising rates, how they intersect with inflation and bond rates, the value of active management, and also presents investing strategies when rates are inching up.
- Investment positioning, major themes, and asset class positioning updates.
Don’t get me wrong. Market volatility—particularly after the bulls have been stampeding for nearly 10 years—can be unsettling, even to seasoned investors. But experience can help keep emotions in check when those bulls start to buck. After all, it’s hardly our first time at the rodeo, having shepherded client assets through all kind of markets and economies over the decades. So when the CBOE Volatility Index (VIX), which provides a gauge of volatility by measuring pricing in the options market, stepped above 20 in October, we note that this year’s volatility in U.S. equities is not all that extraordinary relative to history. The standard deviation of daily price returns is much higher than 2017 but falls near the middle of the pack since 1957.
The recent volatility over the past few weeks stems from a number of sources. Strong U.S. economic data led Federal Reserve Chair Powell to comment on the “long way” the Fed has to go in raising rates before they will hit “neutral” (the rate estimated to neither stimulate nor restrict the economy). This sent the 10-year Treasury yield above 3.2%, to the highest level since 2011. Higher rates elevated concerns about the negative impact on equities—both from the perspective of rising borrowing costs, as well as “competition” from bonds offering more income. Trade concerns and slowing growth in China are also weighing on investor sentiment globally. We agree that U.S. companies are not immune to repercussions from tariffs, and there is anecdotal evidence that some smaller companies are feeling the impact of higher input costs. But in our view, the market has swung from one extreme to the other and is now extending what is arguably a healthy, normal, well-telegraphed moderation in Chinese growth to all areas of the equity market. Pressures are exacerbated by indices hitting “technical” levels (like 50- or 200-day moving averages) and the subsequent selling by short-term traders, algorithmic trading strategies, and passive vehicles.
One of the most dangerous moves an investor can make is to cut and run out of fear. Instead, it is critical to remove emotion from the equation and rely on facts like these…
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