This is Water

 

February 13, 2018

Written by Nathan Erickson, CFA®, CAIA, Partner and Chief Investment Officer

One of the most popular commencement speeches of all time is David Foster Wallace’s titled “This is Water” to the Class of 2005 at Kenyon College in Ohio. Wallace begins the speech with a short story about two young fish swimming along, who happen to meet an older fish swimming the other way. The older fish nods at them and says “Morning, boys.  How’s the water?” The two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”

While Wallace’s speech goes on to recommend to young graduates that they look beyond their own circle at the world around them, we see applicability of the fish story to the current market environment. For over a year many market “fishes” have been swimming along, comfortable and confident, unaware of their surroundings. For them, last week seemed abnormal, but in reality, it was normal.

As we said in our year-end commentary, 2017 was an unprecedented year for low volatility.  Markets were calm based on a Republican led house, senate, and White House; a Federal Reserve Board that remained cautious with fiscal policy; positive economic data; and the eventual passing of a stimulative tax bill. However, Mr. Market can be fickle in the short term, and sometimes good news can be interpreted as bad news.

We believe the primary cause of the market’s change of direction over the past two weeks was a fear that the economy may grow too quickly, resulting in the Fed adjusting monetary policy to slow it down. In particular, strong wage growth numbers, low unemployment claims, and strong manufacturing data were interpreted to lead to higher inflation. While the Fed has stated that they expect to raise short-term rates three times next year, this positive data resulted in increased expectations that the Fed will raise rates four times.  In addition, longer-term interest rates rose for a variety of reasons, including higher inflation expectations and the Fed buying less of the new Treasuries issued by the government. A sharp rise in yields, and fear that the Fed may put the brakes on economic growth, led to the wild market ride over the past couple weeks and a rare moment where investors experienced negative stock and bond returns at the same time.

To the young market “fishes,” this may have caught them by surprise.  It may have resulted in an urge to act or a feeling that this is the beginning of the next big downturn. To the older fish(es), this is water. Market volatility is normal. Furthermore, experienced investors know that the Fed increasing rate hikes from three to four will have little-to-no long-term effects on their portfolio returns and that diversified portfolios are well equipped to handle many different types of market volatility. Our clients may have noticed that diversifying investments in their portfolios were unaffected by the last two weeks of volatility, including reinsurance and several others. Those investments are unrelated to economic data points, the level of interest rates, and most importantly, the short-term emotions of market participants.

2018 may see even more volatility, but we remind our clients that this is normal. As we mentioned in our year-end commentary, too little volatility can lead to excess risk taking. When asset classes exhibit a normal level of volatility, investors are more cautious and aware of the risk required to earn returns. Equity markets are unlikely to repeat last year’s performance in 2018, and traditional bond markets may struggle as well. If that is the case, we remain confident that portfolios are well constructed to handle a more “normal” year.

Written By

Mark Feldman

Nathan Erickson

MRA Associates Work-From-Home Policy

3/18/2020 – MRA Associates cares about the health and safety of our clients, our MRA team members and their families, and the community. As we continue to navigate this pandemic and do our part to slow the spread of COVID-19, we have implemented a work-from-home policy.

Our firm is well prepared to continue to serve, support, and advise our clients. Team members have remote access to all systems and processes to ensure continued normal business operations. Please help us to do our part by using telephone and video conferencing for meetings with us until the threat of contagion is significantly reduced.

As your trusted financial partner, we are monitoring the current economic environment, discussing approaches to short-term challenges, and developing innovative solutions. Please know that we are available to you for all of your needs and concerns. Please do not hesitate to reach out to our team if you have any questions.

(800) 222.1232

MRA Associates