Market Insights

Right around this time last year, we were spending a lot of time talking to clients about fixed income. Most were concerned about their fixed income returns compared to what equities were doing, and many even posed a very direct question, “Why do we even own fixed income?”. Some of these questions were being asked rhetorically as I believe most investors know they needed fixed income in their portfolio, they were simply frustrated that a seemingly “safe” asset class was actually providing negative returns. Others were probably more serious, seeing that it was obvious that bonds were going to provide negative returns for the foreseeable future, and under no circumstance did that seem appealing. To be honest, it was a very fair question and one that was being asked by almost everyone. But, as often happens in markets, trades that seem so obvious in the moment have a way of humbling everyone.

If you have tuned into the financial news lately, you have probably heard the words “financial bubble” mentioned more than a few times. The first great financial bubble was “Tulipmania”. Tulipmania occurred in the Netherlands during in the 17th century. Without giving the full backstory of how this phenomenon began, tulips were introduced to Europe from the Ottoman Empire around 1550. These flowers were different from anything in Europe due to their intense color. They quickly became a symbol of status and were seen as luxury items. Speculators entered the market, buying and selling tulip bulbs with the expectation of making a profit.

Quick confession: I stole the title from an article I saw yesterday. I didn’t necessarily do so because I thought it was a great title; rather, it made me laugh and think, “Here we go again with these hyperbolic headlines.” This is probably the 5th or 6th “most important week of the year” so far, if anyone is keeping track. With that said, after the mild sarcasm, this could, in fact, be a very important week for the direction of the markets.

Before smartphones and tablets were invented, what some refer to as the “good old days,” summer activities involved a little more adventure. One popular family activity was going to the local carnival. While these still exist, their popularity has waned over the past decade. One of the top attractions was the Fun House. The Fun House was usually a large building or trailer with a collection of separate rooms that each held a unique feature. Some effects were more intense than others but one constant was the Hall of Mirrors. The Hall was a room or actual hallway that contained a series of strangely shaped mirrors that would distort ones image in a variety of interesting ways. There was always something interesting about seeing yourself appear 10 ft tall or looking like a giant “S”. Now imagine the bond market is walking through the Hall of Mirrors.

If there is anything that financial media is certainly guilty of, it’s producing too many articles that portend “big things” are just about to happen. It’s usually conveyed right in the title with a sense of either impending doom or riches. Of course, the goal of most articles, whether financial or not, is to get as many people as possible to click on the article. Creating a shocking or intriguing title is certainly a good way to do that. Most of the extreme investment pieces don’t stop at just the title. They meticulously lay out how and why something crazy is going to happen and many will even take a stab at predicting “when” as well. It usually isn’t enough to just lay out the possibility of an inflection point in the market. To really sell it, the author must include the details, because why would someone just imply there will be a market crash when they can predict the market will crash by (insert extreme, arbitrary number and date).

You are heading down the road, without a care, and then you see a sign that reads, “Road Closed due to Political Risk”. Welcome to the markets in 2019.