During the bull market run of 2009-2020, it was easy making money, due in part to accommodative monetary and fiscal policy, and the euphoria of the markets reaching record highs. Investors were encouraged, and rewarded, for piling into the U.S. stock markets regardless of valuations or any pending storm clouds. With interest rates near zero, and international markets lagging, investors were being told that there is no alternative (“TINA”) to the U.S. markets.
In March of 2020, we experienced a global pandemic, and Governments put the global economies into a self-induced coma to try and prevent the spread of COVID-19. After some short-lived volatility, the markets resumed their climb, fueled by ‘helicopter money’ from the Fed and the Government. Of course, as it has throughout history, the easy money policies have led to rising inflation.
With inflation already at levels not experienced since the 1980s, Russia invaded Ukraine, putting increased pressure on food and energy prices. To tame inflation, the Fed has begun to rapidly raise rates, as they were behind the curve. Fed Chairman Powell is trying to navigate a ‘soft-landing’, avoiding a recession, but some pundits believe that we’re already experiencing a recession.
Meanwhile, the stock market has fallen dramatically as it digests the impact of inflation, the increasing likelihood of a recession, and slowing corporate earnings. The U.S. stock market closed the first half of the year down over 20%. During the bull-run, the mantra was TINA (there is no alternative) - now the question becomes, what are the alternatives?
Navigating Today’s Markets with Alternative Investments
Learn how the savviest investors are making significant allocations to alternative investments.
What to do now?
As we examine the current market environment, we must recognize that there are several challenges that need to be addressed – lower equity returns and fixed income yields, elevated correlations, record inflation, and increased volatility.
Equity returns – the pandemic exposed supply-chain issues and an unhealthy dependence on certain countries for valuable resources (Russia, China, etc.). The markets have become more discerning in distinguishing between good companies, with strong fundamentals; and companies impacted by supply-chain issues, rising costs, and lagging revenues.
Takeaway - many strategists are predicting substantially lower equity returns over the next 10-15 years, consequentially, investors need to identify alternative sources of returns. Potential solutions: Private equity, infrastructure, event-driven & long-short hedge funds.
Fixed income – after the GFC, many countries began to offer negative yielding debt. While the U.S. resisted the temptation of issuing negative yielding debt, at its peak there was roughly $19 trillion in negative yielding debt globally - now the levels are down to roughly $300 billion. The Fed kept rates near zero for too long, and now has begun to raise rates dramatically to combat inflation.
Takeaway – while fixed income yields have been rising, they are still below historical levels, and investors are seeking alternative sources of yield. Potential solutions: private credit, real estate, & alternative credit funds.
Correlations – due to the interconnectivity of the global markets, correlations have risen over the last couple of decades. To compound the problem, in periods of shocks, like during the pandemic, most major asset classes moved in lockstep with one another. When investors need diversification the most, it often fails to buffer the volatility.
Takeaway – investors need to identify asset classes and investments that exhibit low-negative correlation with traditional investments. Potential solutions: global macro, managed futures, & natural resources.
Inflation – after flooding the economy with easy money to offset the effects of COVID-19, inflation began spiking in 2021, reaching levels not seen in decades. Many pundits have suggested the Fed is behind the curve and waited too long to begin combatting inflation. In June, the inflation rate was reported at 8.6%, its highest level since 1981, and there are no signs that inflation will abate any time soon.
Takeaway – investors need to identify investments that can help in fighting the corrosive impact of inflation. Potential solutions: real estate, infrastructure, & natural resources.
Volatility – the events above have led to increasing volatility, both in the number and magnitude of market shocks. We are being reminded of the fragility and interconnectivity of the markets. The conflict in Ukraine rocked our markets, supply-chain issues caused missed earnings, and inflation has had a ripple effect throughout the world.
Takeaway – investors need to identify investments to help buffer the increased bouts of volatility. Potential solutions: natural resources, macro, & multi-strategy hedge funds.
The New Advisor Toolkit: Private Markets
Historically, private markets have been the exclusive domain of large institutions and family offices, due to accreditations standards, high minimums, and limited liquidity, but that's changing.
The Role of Select Asset Classes
There are four primary goals of each asset class within a portfolio – growth, income, defense, and inflation hedging.
Growth - the growth in the portfolio will primarily come from the equity and equity-like allocations including U.S. and non-U.S., equity hedge, infrastructure, and private equity.
Income – the income will primarily come from fixed income (treasuries, corporate bonds & high yield), plus private credit and real estate (public & private).
Defense – the defensive portion of the portfolio would include cash, commodities (gold), macro, multi-strategy, and natural resources.
Inflation hedging – inflation hedging would include certain commodities, TIPS, real estate, infrastructure, and natural resources.
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