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As the calendar has turned to , and the investing world hopes and wonders for a repeat of , here are a few things that are on our minds as we embark on the new year. The magnitude of the bitcoin movement in was remarkable. The move itself and the frenzy surrounding it make comparisons to other bubbles inevitable. So what are our thoughts on bitcoin? Like everything else in the investing world, price and timeframe matter greatly when allocating capital.
Digital assets and blockchain technology appear to be here for a while, but just as with the evolution of the internet, there will be winners and losers, regulatory considerations, and a process of price discovery.
The same can be said of the investing business, that there are many professional investors looking for the same opportunities for alpha. The ability to use modern technology to quickly and efficiently exploit market anomalies, coupled with the increase in assets in passive strategies, has seemingly reduced volatility, shortened periods of volatility and increased the difficulty for asset managers to outperform market benchmarks.
We can attribute this to a variety of reasons, but one of them surely has to be that the economy continues to improve and appears to be on a more solid footing.
This improvement is visible in a variety of indicators: Recently passed tax reform and continuing deregulation are trends that also appear to be pro-growth. However, a stronger economy and tax reform could translate to better earnings, which would also be a positive for the markets. This needs to be balanced against the fact that equity valuations by almost any measure remain above average, and the U. Federal Reserve and the unwinding of its balance sheet, as well as any potential action on rates, are a wild card.
While predicting market performance is at best a guess, the stronger data and business-friendly environment appear to suggest that the current conditions argue against a or type of market event.
Please note, these materials were prepared for informational purposes only and do not take into consideration your individual circumstances. Past performance is not indicative of future returns. Alternative investments possess features and risks distinct to the individual investment vehicle, and any decision to invest in such vehicles should be made based on your individual circumstances in consultation with appropriate financial professionals.
Bitcoin Frenzy The magnitude of the bitcoin movement in was remarkable. Three quick thoughts come to mind here: Historically, investing has been a mean-reversion endeavor: There have been other periods where passive investing has outperformed and volatility has been reduced. But, as day follows night, these periods have receded, although the timing and length of such episodes is impossible to predict.
Mean reversion would argue that some of the things that have been out of style in recent periods have the opportunity to exceed expectations going forward. Most of us have long-term goals e. Many alternative strategies have underperformed return expectations which is different than benchmarks or portfolio roles but appear to be headed into an environment more favorable to their mandates. For instance, reinsurance strategies are coming off one of the most difficult years in history, and market rates have hardened to the benefit of capital providers; global reversal of easy monetary policy could present opportunities for trend-following strategies; and greater dispersion in equity performance would generally benefit active management, including equity-based hedged strategies.
Re-weighting equity allocations i. It can also be avoiding either panic or euphoria and paying attention to valuations and managing risk. Bill Hornbarger Chief Investment Officer Market Recap The fourth quarter topped off a rather unprecedented year for equity markets as equities recorded double-digit gains with historically low levels of volatility—despite geopolitical tensions, domestic political infighting and natural disasters.
Additionally, for the first time on record, U. Emerging-market equities finished the year ahead of U. Even though valuations may seem elevated, there may still be some room to run given earnings and macroeconomic growth trends, though heightened volatility from recent levels would not be much of a surprise.
Longer-dated Treasuries continued to lead those with shorter maturities, tightening the yield curve to its flattest level since the Global Financial Crisis GFC. The Republican-led Congress was able to pass a tax reform bill at the end of the year, with a significant reduction to the corporate tax rate and a reduction in most individual tax rates. Although the tax bill should improve the cash flow available to companies and the net income to individuals, it will take some time for all the ramifications to become clearly realized.
Over the year, we continued to see a synchronization of global economic growth and improvements of employment. As a result, many central banks have begun to modestly tighten monetary policy. Federal Reserve the Fed voted to raise the federal funds rate in December to a target range of 1.
Policymakers plan to raise rates three more times in and twice in They also raised their expectations for economic growth in , expecting the economy to grow at a slightly faster rate of 2. Outside of the U. Also, the Bank of England increased interest rates in November for the first time since , noting that further rate increases are likely to be dependent on Brexit negotiations. For November specifically, the positive contributions from ISM new orders, consumer confidence and the financials components more than offset the negative contributions from weekly initial claims for unemployment and building permits.
Over the previous six months, strength among the leading indicators has remained widespread. A metric that will be tracked more closely in the near term will be wage growth, which has been sitting only slightly above inflation, most recently at 2. Consumer confidence has been boosted by a few factors, including the job market, stock market and fiscal reforms. Department of Commerce, construction spending rose to an all-time high near the end of the year. For the first time on record, U.
Emerging markets finished the year like they started, leading both the U. Excluding the benefits of currency, although still recording strong returns, international developed equities finished the year trailing both the U.
The sectors recording the best performance in the final quarter of the year included consumer discretionary, technology and financials; the worst performers included utilities and health care.
The segment showing a decline in its valuation relative to history was U. With the large drop in its valuation, U. With that said, both remain well above their historical average. Yield Curve The shape of the yield curve compressed to its flattest level since before the GFC.
Although there was a slight divergence between the two spreads, both have tightened significantly year-to-date.