This article is part of a regular series of thought leadership pieces from some of the more influential ETF asset managers in the money management industry. Today's article is by Michael McClary, chief investment officer of Akron, Ohio-based ValMark Advisers, which markets the "TOPS" brand of asset allocation models.
Do you remember the first time you got into trouble and your parents couldn't, or didn't, swoop in and bail you out? This memory may be analogous to the experiences of investors recently.
For many children and adolescents, time growing up is spent testing boundaries and learning through making mistakes and encountering challenges. However, childhood is also defined by the structure that parents can provide.
Many children in the U.S. are blessed to have adults in their home who pay attention to how much they are eating, sleeping and doing their homework. Likewise, mom and dad were there alongside many of us, if we did something we weren't supposed to.
Central Banks As 'Helicopter Parents'
As a parent, we are told not to be "helicopter parents." We have to let little Johnny get skinned knees, just like we did. For fear of ridicule, even those of us who might have some helicopter traits don't readily ask to wear that moniker.
For the past few years, with steady Fed stimulus, the U.S. stock market has felt a little bit like childhood. However, the stock market is, undoubtedly, the real world. As an adult, meeting basic levels of net worth, you can open an online trading account, short stocks and take on near-limitless financial liability.
The economic intervention of central banks since the 2008 financial crisis is well-publicized. In previous pieces, we have highlighted research outlining the financial and qualitative benefits and drawbacks from central bank intervention into the world's economies and stock markets. I think few would argue that they haven't been acting like helicopter parents.
For Wall Street's most successful and proud CEOs to be bailed out by the government in the financial crisis, they must have felt like being the star quarterback and having your mom come bail you out in curlers and sweatpants in front of your friends.
Where Did The Helicopter Parents Go?
With the Fed's recent interest rate increase, the central bank seemed less likely than we have seen for many years to step in and bail out the market from daily volatility.
Reality is the end of quantitative easing in the U.S., which portends the helicopter parents are gone for now. Or, at least they are not as reliable as they have been.
Mommy has likely stopped making sure there is a nutritious meal for dinner; Daddy is probably not going to talk to your coach because coach is not playing you enough; and your teachers largely don't care if you skip your homework and fail the class.
Beyond the direct impact of the divergent economic policies globally, there have been numerous secondary and tertiary effects. For example, partially due to the massive amounts of U.S. Treasurys that emerging market countries have sold to defend their currencies, Deutsche Bank believes that U.S. Treasury yields will go higher.
This is a big change for most investors. Didn't we all get used to immediate hangover relief? Over the last few years, the relief rally has been as expected as grandpa falling asleep on the chair after Thanksgiving dinner.
For many investors, seeing the market follow down days with further weakness in 2016 is as surprising as seeing grandpa instead drink a few Red Bulls and start dunking basketballs on the driveway basketball hoop.