Forget the Great Moderation. The credit crisis revealed that to be a mirage. Forget the Great Rotation. Investors never did switch en masse from bonds into equities. What we have today is more like the Great Frustration.
Investors have little love for any asset class, it seems. After years of cash injections from central banks, asset prices are inflated above comfortable levels. Parts of the fixed income market are at nosebleed heights – think junk bonds– but even elsewhere there is reason to be cautious in the short term when it comes to putting money into stocks, real estate, hedge funds . . . you can talk yourself out of almost anything.
It is not as though economic optimism is missing. The mood at Camp Kotok this year was buoyant, and not just because of the convivial company and the fine wines.
The event, which took place at the beginning of this month at Grand Lake Stream in Maine, is as unpretentious and charming as its creator, David Kotok, chief executive of Cumberland Advisors.
It is a kind of informal Jackson Hole or Davos for luminaries of economics, investment management and policy making, on the shores of one of the prettiest lakes in the US. Mr Kotok has been inviting an ever-increasing circle of friends and acquaintances to join him in these life-affirming surroundings since he and colleagues escaped unharmed from the World Trade Center attacks in 2001.
Place your bets
During the day, participants set out with local guides in the hope of catching perch or bass for lunch, while evenings are spent in lively – and strictly off the record – debate. Participants hew to no common economic philosophy, so the Camp Kotok tradition of placing bets on various economic and financial indicators is always a good guide to smart money thinking about where markets are headed over the next year.
To reiterate, the mood was one of cautious economic optimism. The average forecast for US GDP a year out was 2.8 per cent, so hardly euphoric, but a vote of confidence that the Federal Reserve will successfully manage its exit from quantitative easing without tipping over the canoe. Unemployment, according to the average of 25 forecasts, will be down to 5.7 per cent by June next year, from 6.2 per cent now, and inflation will remain under control at 2.5 per cent.
What was notable was that these forecasts, broadly in line with consensus, do not translate into enthusiasm for any particular investment theme. The average forecast puts the S&P 500 at 1,927 next June, which would be a flat performance from its current level. Admittedly that number is skewed by one unnamed Armageddonist, who foresaw the stock market slumping by more than half. Taking the median forecasts so as to limit the impact of his or her forecast, campers still only estimated 2,010 on the S&P 500, barely 4 per cent upside. As for bonds, a forecast 10-year Treasury yield of 3.02 per cent suggests a difficult year ahead as prices slide; gold and oil both look flat.
Central banks’ monetary easing has pushed asset prices to levels that feel uncomfortable to long-time investors, while suppressing the market volatility that could allow investors to pick up a bargain or two.
Keep your powder dry
As the sun set over the lake and participants gathered for a Maine lobster dinner at Leen’s Lodge, Dean Eisen, family wealth director at Morgan Stanley’s Graystone Consulting in Maryland, confided that it is a frustrating time to be a financial adviser. A family that comes into money now may be itching to put it to work, but as “stocks are expensive and fixed income is very expensive”, the best thing a broker can advise is to keep one’s powder dry.
“There’s a price to pay. In real terms, an investor would be losing money on that cash . . . The issue is, how long will it take us to create a more realistic value of fixed income or equities?” Mr Eisen said.
He is not alone. “Of all the position decisions across the broad asset classes, cash is always the one that causes the most angst,” Cumberland Advisors wrote in a note to its clients in the days after Camp Kotok. Cumberland’s tactical trend allocation portfolio has been around 16 per cent in cash since early July, “which provides us with some dry powder as the domestic equity market drifts lower”.
Therein lies the hope for stock markets, though. Cash is likely to move into stocks on any pullback, limiting the downside. The Fed still has the market’s back, as the economic recovery grinds on. The recent sell-off has been driven not by fear but by frustration.
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