Risk Monitor: Navigating the markets—where is my GPS?


What risks lie ahead in the fixed-income markets? What are interest rates going to do? What happened to inflation? And what is going on with stocks? There’s been a lot of head-scratching over the equity market's recent behavior, not so much on the rotation out of Internet and biotech stocks—a good argument could be made these got ahead of themselves after last year’s run and investors are just being prudent. No, the bigger issue has been the general shift out of momentum/growth and into value/defensive sectors and large-cap names. This suggests the market may be less enthusiastic about 2014’s growth prospects than we at Federated and some of our Wall Street sources are.

The problem with this slower-than-expected thesis—notwithstanding that Street projections are hardly eye-popping with real GDP forecasts bopping around the 3% annualized growth range—is it’s too early to know. The reality is that so much of the data got so skewed by a harsh winter that enveloped much of the country that it’s going to be a while before we get a good read on underlying trends. Besides, what we have seen so far—on March payrolls, regional PMIs, the manufacturing ISM, retail and car and truck sales—would indicate businesses and consumers are getting primed to satiate pent-up demand.

From my perspective, something more fundamental may be at work with investors. After being badly burned by the dot.com-driven collapse that ushered in the past decade and the global financial crisis that closed it out, investors remain leery of stocks. Yes, last year saw U.S.-listed stock funds attract record inflows, ending a five-year exodus. But January’s emerging-market hiccups saw equity investors head for the doors, with the first week of February experiencing record outflows. Investors have turned cautious about bonds, as well, after a record 30-year bull market looks to be coming to an end as low yields and the potential for rising rates make for meager income and potential negative returns.

Managing risk goes way back
This has left investors wondering how to navigate the markets. They want to make money, of course, but in some ways, what they want even more is to avoid losing money. This dual goal has led to the rising awareness of strategies that seek to minimize risk as much as—if not more than—generating excess positive returns. Falling under the managed-risk or alternatives banner, the strategies will be getting a closer look in future commentaries and related pieces on this website.

But before doing so, we wanted to make one point clear: far from being something exotic and newfangled, the concept of managing risk is anything but. In fact, it’s been at the heart of modern investing since its founding. Don’t take my word for it; take the words of the late Benjamin Graham, considered by many to be the father of value investing, and those of his most successful protégé, Warren Buffet:

  • “The essence of investment management is the management of risks, not the management of returns.”—Benjamin Graham from his 1934  book “Graham and Dodd’s Security Analysis”
  • “The first rule is not to lose. The second rule is not to forget the first rule.’’—Warren Buffett

Stay tuned for more on this subject.

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.
Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.
The Institute of Supply Management (ISM) manufacturing index is a composite, forward-looking derived from a monthly survey of U.S. businesses.
Federated Equity Management Co. of Pennsylvania
Copyright © 2015 Federated Investors, Inc.

Connect with us: LinkedIn YouTube iTunes