Many investors were understandably concerned about how the recently concluded debt ceiling negotiations were impacting global markets. In the lead-up to Congress’s eleventh hour agreement to raise the nation’s maximum allowable borrowing, one could observe a wide range of public prognostications. There were predications that a deal would be struck before or very soon after the deadline and that market impact would be minimal. Others argued that we would ‘default’ on our debt, capital markets would freeze up, and financial chaos would ensue. As usual, you could also find assorted pundits contemplating all other imaginable possibilities.
In addition, those events were very closely succeeded by the heavy volatility (and losses) that have been experienced in global equity markets. Each major market move was followed by the inevitable chorus of ‘experts’ explaining each swing in prices…after the fact, of course.
When our clients call and ask us what to do in light of these types of potentially disruptive events, what do we tell them? We focus on four fundamental questions:
1. What is your investment horizon?
If the funds that we currently invest on our clients' behalf are not assets which the client intends to have in the markets for the mid- to long-term, than those assets shouldn’t be there – regardless of what’s happening in Washington, DC or on Wall Street. Money which a client and his family need in the short-term should be kept in cash or secure liquid instruments. If the funds which we have invested on a client's behalf continue to be longer-term investment assets, then we believe they should remain allocated according to our underlying methodology.
2. What trading decisions can we make based on these current events?
We do not believe that market prices fairly and consistently reflect the fair value of all securities – if we did, there would be no value in the extensive dynamic asset allocation methodology which we employ. However, when it comes to comparing current market prices against daily news announcements, we do believe that each new bit of information is in large part almost instantaneously accounted for in securities’ prices.
In addition, even if time were not a factor, markets are incredibly complex, the implications of global events are often far from simple to anticipate, and attempts to predict market moves based on current events or previous stock price changes is a notoriously difficult game. In other words, even if the events we’re witnessing are not already reflected in daily market prices, it’s far from clear where to move money during many real-time disruptions.
3. If we do talk through the idea of making short-term adjustments, which scenarios (and therefore determinations regarding allocation changes) make sense to you?
Would a possible ‘default’ and downgrade mean a flight from US securities, or will general global economic strife (including the negative impact of US troubles) cause an influx of cash to US markets as still the best place to be in an overall bad situation?
Within the US, will the debt deal signal a hopelessly dysfunctional governing climate that indicates trouble to come for US securities, or will a solution centered around no new taxes and cuts in government spending be viewed as a positive thing for domestic financial conditions?
Are US companies, with ‘cash hordes’ and predictions of strong earnings, a good bet for the near-term or will the likely rise of interest rates, continued high unemployment, and lingering troubles in the housing market mean low or negative returns from stocks?
4. As long as you are still a long-term investor, do you remain comfortable with how your asset manager operates in light of the problems posed by #2 and #3 above?
The way we invest our clients' assets is based on a global and valuation-based asset allocation methodology. This system reviews macroeconomic data and market variables such as inflation, interest rates, economic growth, and earnings and dividend yields to make determinations about fair values. We then shift funds to asset classes which are priced attractively relative to our analysis of fair value and shift funds away from assets which appear over-valued. The research we rely on tells us that careful fundamental analysis and infrequent portfolio readjustments are the way to optimize risk-adjusted returns – and our performance is, for us, an encouraging validation of the approach.
After discussions like this with a number of our clients in the wake of the debt ceiling debacle and the violent market gyrations of just the past few days, we have found that everyone has chosen to stay the course. Namely, maintain a long-term focus on opportunities to generate risk-adjusted returns by taking advantage of disparities between prices and valuations in the global debt and equity markets. Most investors (and investment advisors) don’t enjoy the volatility of recent events but our research and returns from the recent past, including the truly dramatic financial turmoil of just the past few years, tell us that maintaining the discipline of our methodology remains the best approach.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This article is for informational purposes only and does not express an opinion or constitute an offer by Holos or any of its officers, directors, employees or agents to buy or sell any particular security or financial instrument or to provide any investment advice or service. All investment management services are offered through the presentation of Securities and Exchange Commission Form ADV, personal contact with Holos representatives and the execution by you and Holos of an investment advisory agreement.
The information in this article is descriptive of the investment strategies of Holos and the services and strategies described may not be available to, or suitable for you. Any strategy selected must be consistent with your investment objectives, time horizon and financial goals as well as needs. These services may be subject to change without reference or notification to you. These methods of investing subject you to the risk of loss, including the risk of losing all invested capital. There are also tax implications of these decisions and we do not provide tax advice.
This article may contain facts, opinions, data and recommendations (including forward looking statements) of third parties or organizations that Holos believes to be reliable, but Holos does not warrant or guarantee the accuracy of such information or otherwise endorse the views of such organizations.
