August 2014 Advisor Thought Leadership Insights: The Hidden Price of High Performance

by on Sep 02, 2014

With years of outsized positive market performance behind us (the Dow Jones topped 17,000 this week), many thought leaders in the asset management industry wonder when and how this historic bull market will suffer a downward correction. Others dismiss historical predictors and wonder whether the current market could turn bad at all. We found five standout articles from our August research that address both possibilities:

Goodnight Vietnam

1. PIMCO: Goodnight Vietnam – Industry titan Bill Gross offers his take on “the dusk of asset appreciation” as interest rates necessarily rise after nearly five years at near-zero levels and decades of being low in general. Gross points to lackluster growth around the world to clarify that in PIMCO’s view, income-generating investments will replace equities as the primary driver of future returns for investors. General equity performance will not necessarily decline in Gross’ outlook; rather, it will simply not grow at currently expected rates or may remain generally stagnant as the utility of income grows by comparison.

Era of Multiple-Driven Gains is Over2. John Hancock: Era of Multiple-Driven Gains is Over – William Priest, CEO of Epoch Investment Partners, recaps the tremendous gains made in domestic and foreign markets since 2011, attributing them to low interest rates and to the concerted efforts by the world’s central banks to right their economic fortunes through accommodative policies. As the recovery becomes more stable, however, these policies have to eventually adjust in response to changing market demands; for example, central banks at home and abroad are taking steps to dial back their quantitative easing policies. Priest argues that as the market changes, aggressive cash flow analysis will be required of big equity asset managers in order to support the same kinds of superior equity returns in the future.

Time to 86 the ’87 Comparisons3. Oppenheimer: Time to 86 the ’87 Comparisons – CIO Krishna Memani examines the current U.S. equity environment – the S&P 500 and Dow Jones are currently at or near all-time highs – in relation to seemingly similar conditions preceding 1987’s “Black Monday” market crash. Memani argues, however, that the past and present situations share only superficial similarities, as the market fundamentals currently at play in the stock market are simply more favorable to continued growth. For example, inflation today is only half of what it was in 1987, and the current Federal Reserve regime will accommodate lower inflation even if it fully draws back on QE over the next few years.

Alert but not Alarmed4. MFS: Alert but not Alarmed – Discusses the effects that years of low-rate, “easy money” policies from the Federal Reserve and its counterparts abroad have had on investor attitudes. Because equity markets have continually reached new heights on the back of these kinds of policies, equity investors are generally complacent in their allocation to equities when really they should consider how changing fiscal policies might impact their equity holdings.

A Fed-Fueled Market, for Better or Worse5. Allianz: A Fed-Fueled Market, for Better or Worse – Examines the central paradox at play in U.S. markets, whereby the Federal Reserve is tapering its QE purchases in response to improving market conditions; those improvements can be largely attributed to the easy money effects of QE in the first place. The author also contends with the possibility that the Fed may have to renew its QE purchasing patterns to support the equity bull market if the country’s overall economic growth is too jeopardized by the prospect of a quieter or diminished stock market.