When will the Federal Reserve taper? This question has been the main driver of global asset prices over the past several months, from the Bernanke surprise that roiled the fixed income markets in June to the most recent surprise by the Federal Reserve to not taper. Having gone through the initial cycle of volatility, risk assets rallied in the third quarter with additional upside support from Yellen’s nomination for Federal Reserve chair.
At this juncture of the market cycle, having rallied 160% since the March 2009 lows and a full 4.5 years into the recovery, the road ahead is opaque at best especially with notable complacency returning to the market. One interesting statistic, especially in today’s context, is that since 1980 the average intra-year decline in the S&P 500 is 14.7%. In other words, equity prices are inherently volatile, in good times and bad!
As long-term investors focused on generating attractive risk-adjusted returns over the full market cycle, we try to elevate above the considerable noise to identify opportunities with inherent value propositions. We see the world through a slightly different lens, colored by our collective multi-decade investment experience and multi-asset framework – we do not chase returns, nor are we afraid to be contrarian when risk-reward is attractive.
Having said this, we must acknowledge the significance of the Fed chair and execute our investment strategy with Fed policy in mind. We expect monetary policy to continue to be highly accommodative, but with less attention paid to markets and investor psychology. As a result, Fed policy could overshoot and create higher-than-desired inflation. In the meantime, we focus our time on investments that are attractive on fundamental merits while also developing and implementing portfolio strategies that should prove resilient and be well-positioned when markets inevitably pullback.