Beyond Bulls & Bears

Shrugging Along

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Brooks Ritchey
Brooks Ritchey

Since the 2007-2009 global financial crisis, it seems like many markets have gone nowhere but up—most notably in the United States. Brooks Ritchey, Senior Managing Director at K2 Advisors, Franklin Templeton Solutions, says that amid the third-longest equity bull run in history, investors may not want to leave the game just yet, but would be wise to consider carrying an umbrella.

Brooks Ritchey
Senior Managing Director, K2 Advisors

Franklin Templeton Solutions

To me, Caddyshack belongs in the pantheon of great films in cinematic history, though I do find myself in the minority when sharing this opinion with some of the younger generations in the office.

Critical observations aside, I think we all would agree that markets—like Caddyshack’s unflappable Carl Spackler—have demonstrated a remarkable level of post-2009 optimism and resilience. One could even go so far as to say investor sentiment has at times reflected a sanguine naiveté, or indifference to macro factors, driven forward with an unbridled confidence, fed steadily by a diet of central bank stimulus. Indeed, participants in US markets have apparently not seen the heavy stuff—or at least recognized it—for 2,336 days (as of July 31), representing the third-longest bull run in history.1

Even more compelling, it has been 1,398 days since the S&P 500 has experienced a correction of 10% on a closing basis.2

Resilient indeed!

Out of curiosity, I recently searched Google for the terms “markets” and “shrugged” in the headline or body of news articles published over the six-year period from July 21, 2009, through July 21, 2015. My search yielded an incredible 31,000 results! The headlines (in no particular order) help jog the memory as to the many speed bumps we’ve passed along the way—potential obstacles blown past without so much as a basis point3 shudder.

A Whole Lot of Shrugs

Here are a few of these headlines:

Whole lot of shrugs snip

And the list goes on. My shoulders hurt . . .

To be clear, I am not attempting to predict a market top or correction, or suggest that we all run for the exits. The question is whether the positive momentum can continue. In my opinion, probably. I thought the Chinese market rout this summer could have been the proverbial straw, but the band played on. From our point of view, trying to predict market declines or rallies is not as important as preparing for incipient shocks smartly and strategically; it is about being vigilant. What I am 100% certain of is the markets will correct—eventually.

And when that happens, and the heavy stuff is at long last upon us, I would like to be well on my way to the clubhouse—or at least have a good sturdy umbrella.

My intent is not to instill fear or predict peril, but rather to provide some clarity as to where we stand from a historical perspective. I prefer to be directionally agnostic in times of substantial uncertainty, and these are most decidedly uncertain times. What I would say is that by any measure it can reasonably be observed that the markets are running a tad bit hot, as evidenced by the charts below.

Reversion to the Mean snip_2

 

US Treasury snip

 

VIX index snip

Actively Managing Risk

Perhaps the more important takeaway is that particularly during market extremes, risk management is of utmost importance. K2’s Founding Managing Director David Saunders believes the key to obtaining long-term, positive asymmetric returns lies in minimizing downside capture through actively managing risk. It is about compounding performance over time. Saunders also likes to remind us that bear markets can hurt more and last longer than investors realize—or wish to recall. Averages of course can be deceiving and lead to false impressions. Consider that during the downturn in 1973-1974, it took 7-1/2 years for the market to climb above water, and in 2000-2002 investors did not break even until 20074 (and we know what happened then).

From my viewpoint, there really is only one reasonable way forward. Equity exposure has been a winning investment strategy since 2009, but we believe the winners in the next market phase will be those that demonstrate the most discipline and risk management.

Implicitly, it is our view that the best way to mitigate market risk is through active investment management. The alternative simply means one is willing to go along for the ride, letting the market dictate direction and control. I prefer to have my hands on the wheel (and use the brakes as well).

I prefer to have an umbrella in my golf cart. The market is like a storm cloud threatening to end our game; while it may bring only a mere drizzle, it is not wise to be on the course when lightning strikes. Akin to the Caddyshack theme song, the market may have been telling us, “I’m alright, nobody worry ’bout me.” But we say, shrug at your own risk.

Brooks Ritchey’s comments, opinions and analyses are the personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice, and it is not intended as a complete analysis of every material fact regarding any country, region, market or investment.

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

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What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.  Special risks are associated with foreign investing, including currency rate fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to risks associated with these markets’ smaller size, lesser liquidity and the potential lack of established legal, political, business and social frameworks to support securities markets.


1. Source: Bloomberg LP.

2. Source: Bloomberg LP. Indexes are unmanaged and one cannot directly invest in an index. Past performance is no guarantee of future results. For additional data provider information, see www.franklintempletondatasources.com.

3. Basis points represent a unit of measure for interest rates and percentages in finance; one basis equals one-hundredth of one percent.

4. Source: Bloomberg LP.