Yesterday’s (1/8/14) WSJ article regarding the Fed watching for asset bubbles should be taken as a yellow flag that company earnings will need to catch up to the 2013 multiple expansion. Coupled with the beginning of Fed tapering, the economy and equities will be required to stand more on their own fundamentals.
Many consider May of 2013 to have been a trial ballon for the Fed to see how the markets would react to tapering. Regardless, given the bond markets reaction to the whisper of tapering we should expect rates to continue their move higher, and thus increased volatility in 2014. But the question remains, how fast will rates rise and will that benefit equities, given last years multiple expansion, and given the scheduled reduction in stimulus?
Historically, diversification has proven to be is a good first line of defense in portfolio management, during periods of heightened volatility. But recent history has also reminded us that in fast markets, correlations move toward one, and the benefits of diversification can disappear. Therefore, additional layers of risk management need to added for drawdown protection.
Different types of drawdown protection have varying costs to hedge a portfolio. In our opinion diversification and being tactical can provide the most cost effective drawdown protection available.
To learn read the white paper: Intro to Managed Volatility Strategies: Why Now, Who Benefits, Who Doesn’t & How Do They Work?
Fed Minutes: Bubble Risks Drawing Attention – WSJ.com online.wsj.com
Minutes of the Federal Reserve’s December policy meeting showed most officials supporting a pullback in the central bank’s bond-buying program.
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