This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Tyler Mordy, president and chief investment officer of Toronto-based Forstrong Global.
“Hot summer streets and the pavements are burning” begins the 1983 hit song, Cruel Summer, by British pop band Bananarama. Investors similarly fear a scorching summer in financial markets.
Sources of uncertainty are clearly numerous, ranging from the increasingly theatric U.S. elections to implications of “Brexit” to the timing of a Fed rate hike (although policy announcements are becoming a bit like Groundhog Day—with Federal Reserve Board Chair Janet Yellen popping her head out of the hole hoping to raise rates, only to back away each time).
Any measure of investor activity confirms current macro fears. Volume in inverse and volatility ETFs have reached new highs (recently accounting for more than 10% of the NYSE’s trading activity). Retail optimism toward bonds is also nearing a record high.
More Cash Holdings
Even the pros are nervous. The latest Bank of America Merrill Lynch Global Investor Survey shows fund managers currently holding 5.7% of their portfolios in cash, up from 5.5% in May and the highest level since November 2001. The new poll also showed risk appetite and global equity allocation at four-year lows.
Where to from here? At panic points like this, it is useful to revisit the role of the portfolio manager: Why do clients pay us to manage their wealth? It is not for flawless clairvoyance. Rather, we are paid to anticipate probable risks, prepare for opportunities and importantly, not lose our proverbial minds when everyone else has lost theirs.
That requires a disciplined approach that can extract emotion from the process.
To be sure, markets are reacting to some legitimate macro fears. Central bank actions are increasingly frantic, Brexit creates a long list of unknowns and global demand remains structurally deficient. And there are times when false beliefs can distort economic reality so much that they become reflected in asset prices (this is George Soros’ reflexivity thesis).