Investors in U.S. markets are facing the strongest economy in years, and the most erratic politics. Some are embracing the challenge of reconciling the two.
For Jason Evans at hedge fund NineAlpha Capital LP, the answer is to grasp short-term opportunities. At William Blair & Co., which oversees more than $61 billion, Brian Singer is using game theory to sort signal from noise. And Jim Vogel, a market veteran at FTN Financial, is drawing on lessons from recent history and keeping his eye firmly on the Federal Reserve.
Right now, most investors are focused on a U.S. economic expansion that’s forging ahead and the upswing in corporate earnings, with events in Washington taking a back seat. Financial-market volatility is low and demand for American assets is buoyant. The Fed’s trade-weighted dollar gauge has climbed more than 9 percent from its 2018 low, Treasury rates have been held largely in check in the face of a large supply ramp-up, and the S&P 500 Index is near record highs.
Some worry, however, that this composure simply increases the chances of getting sideswiped in an environment where a presidential tweet, administration fracas, or development in the special counsel’s investigation could upend expectations. With the stakes rising as midterm elections approach and trade tensions still brewing, market swings could soon intensify.
Risk Controls
“This environment is good for trading,” said Evans, NineAlpha’s co-founder and a former head of Treasury trading at Deutsche Bank AG. “It’s more precarious for positioning.”
His core strategy is focused on trading market dislocations, including distortions in the yield curve, which can intensify in a broader market selloff.
“The whole political calculus right now – I have no idea how to discount it, other than I believe the realm of outcomes we are likely to get are probably going to be more than encapsulated in the risk controls we have, including even an impeachment.”
Brian Singer at William Blair is tackling the political situation head on, in an attempt to tease out what might happen. The firm’s head of dynamic allocation strategies uses game theory to explore motivations of decision makers and understand likely actions and outcomes. He’s found that strategy helpful to devise positions around populist macro themes, including Brexit in the U.K.
Midterm Volatility