Financial Markets: Searching for good news
SCOTT KEFER, CFA 21-Apr-2022
When the financial news gets grim, investors become disinclined to read the beyond the headlines. And when it gets really grim—as in the periods after the dot-com crash or the global financial crisis—some might not even want to check their quarterly account statements. Similar dynamics might have been in place during the first quarter of 2022.
Consider all the grim financial news since we began the new year. The Federal Reserve began a new rate-hike cycle with a quarter-point bump in the fed funds rate in March. Treasury yields headed higher, and there are expectations for several more rate hikes ahead. Inflation has been running hotter than even the most dire expectations, and the Consumer Price Index recently registered an annual increase of 7.9 percent, according to the U.S. Bureau of Labor Statistics. And that was before energy prices and other commodities surged higher late in the quarter. Meanwhile, volatility returned to both bond and stock markets. And then investor sentiment took yet another hit when Russia invaded Ukraine in late February.
By and large, financial markets didn’t like any of the first quarter news. So is it any surprise that investors (and advisors) wanted to bury their heads in the sand? Most portfolios and the popular indexes—both stock and bond—were in the red during the first quarter. For example, the S&P 500® Index shed 4.6% during the first three months of the year. A diversified bond portfolio didn’t provide its usual counterbalance either, as the Bloomberg US Aggregate Bond Index declined 5.9% during the same period, which represents its worst quarterly performance in 40 years. Virtually everything but commodities (energy!), utilities, and a few niche strategies were down.
This type of environment where both equity and bond markets decline in tandem clearly illustrates why investors might want to find some room in their portfolios for strategies that have low historical correlations to both stocks and bonds. Thus, the questions begs: Where might investors look for such investments?
One possible approach might be alternative income funds that aim to neutralize equity market risk while consistently generating income regardless of the market backdrop. Theoretically, this would make them viable at all points of the cycle—and especially valuable as portfolio diversifiers when we run into periods when most other asset classes struggle.
There are various liquid alternative funds that seek to generate attractive returns while offsetting equity risk in a prudent manner. But there are critical differences among this group of funds, including how they aim to offset or hedge the equity risk and also in the fees they charge. It’s important that investors check these important details before investing.