5. OPEC or some other factor (see above) pushes oil prices up
6. A runaway US equity market on the upside with multiple expansions against a backdrop of low interest rates and “the best game in town” syndrome. It has happened before.
The combination of the end of QE, lower oil prices, different patterns of growth including a rise in the wage outlook leads to a different and much more diverse set of winners and losers in the markets. We may be entering a more absolute return world where the traditional equity and fixed income investments, overall, experience low rates of return. This truly may be the time when active managers do well, certainly on a risk-adjusted basis. There are major tail risks from primarily geopolitical actions. We believe it is prudent to spend a few basis points in most portfolios as insurance against tail risk, both positive and negative. We also believe that a fresh look at one’s portfolio, moving away from what may have worked over the period of QE, is important. Recent past performance may truly not be indicative of this coming year’s results. We expect that allocations related to risk mitigation will become more important, and at the same time provide decent returns.
Each of these paragraphs could be its own Perspective. We will be updating these, and, of course, commenting on the true surprises that occur, which none of us are thinking about today. We do need to Pay Attention to this new normality and the characteristics of investments that will work. Getting more specific on risk and portfolio construction is important.
This material is being provided for informational purposes only. The author’s assessments do not constitute investment research and the views expressed are not intended to be and should not be relied upon as investment advice. This document and the statements contained herein do not constitute an invitation, recommendation solicitation or offer to subscribe for, sell or purchase any securities, investments, products or services. The opinions are based on market conditions as of the date of writing and are subject to change without notice. No obligation is undertaken to update any information, data or material contained herein. The reader should not assume that all securities or sectors identified and discussed were or will be profitable.
Past performance is not indicative of future results. There is no guarantee that any forecasts made will come to pass. Due to various risks and uncertainties, actual events, results or performance may differ materially from those reflected or contemplated in any forward-looking statements. There can be no assurance that any investment product or strategy will achieve its objectives, generate profits or avoid losses.
All investments carry a certain degree of risk including the possible loss of principal. Complex or alternative strategies may not be suitable for everyone and the value of any portfolio will fluctuate based on the value of the underlying securities. Investing in debt or fixed income securities involves market risk, credit risk, interest rate risk, derivatives risk, liquidity risk, and income risk. As interest rates rise, bond prices typically fall. Below investment grade, distressed, or high yield debt securities are considered speculative and are subject to heightened liquidity, default, and credit risks.