Displaying items by tag: risk

(New York)

Asset allocation as it has traditionally been conceived has taken a beating over the last few years, and especially since the start of the pandemic. The old 60/40 allocation model has been cast aside for years, and investors are using many new techniques to allocate, such as factoring. However, one easy-to-implement and effective way to think about allocation is the balance of active and passive investments one holds. Active investments, when well done, can offer long-term outperformance. However, they also have more significant risks. Accordingly, this can be the risk/upside portion of a portfolio, while passive strategies, which are almost by definition more diversified, can be more of a hedge.

FINSUM: This not only makes sense in equities, but this consideration about active vs passive holds across different asset classes as well.

(New York)

The market is split over dividend stocks. On the one hand, about half the market thinks the huge wave of dividend cuts are over and that most of the damage has been done. One the other, many worry that not all the deleterious effects of COVID have manifested themselves on corporate behavior and that further cuts may still be in the works. The overall picture seems to be one where caution is due given the big jump in valuations and the continued possibility of further cuts. For instance, bank and credit card companies look likely to cut further as high unemployment leads to worsening credit quality and more delinquency. Wells Fargo just announced a dividend cut, for instance.

FINSUM: Our thinking here is to be careful. Even if the economy does not have another lockdown, the full effects of this recession may take a little time to fully show themselves in dividend cuts.

(New York)

One of the aspects of this bear market that has really alarmed investors is the speed with which the market has rallied from its lows. Huge gains of well over 35% have shocked investors into feeling like indexes are bound to fall again. In some sense that sentiment makes sense since it has happened before, such as in the dotcom bubble. However, according to BlackRock, it is absolutely time to go risk-on, but with a twist. The asset manager says that sovereign bonds have very little upside or protection to offer right now, so instead investors should put their capital into credit and higher-quality equities. “Over the next six to 12 months, we favor credit over equities given bondholders’ preferential claim on corporate cash flows and prefer an up-in-quality stance in equities”.

FINSUM: We particularly like the argument about sovereign bonds not offer much right now. With central banks already at their zero lower bound and sovereigns priced very highly, there is just not much to gain and plenty to lose.

(New York)

Goodbye bearishness, hello risk-on. JP Morgan took a pivot from the rest of the Wall Street research machine today and took some bold steps in its allocation recommendations. The bank said that investors should take money out of gold and other risk averse assets, like government bonds, and put it into risk assets like stocks. The bank’s strategy team said “We maintain a significant and incrementally larger tilt in our model portfolio towards risky assets, based on signs of a cyclical recovery, easing geopolitical tensions, synchronized monetary easing, and defensive investor positioning across asset classes”.

FINSUM: The clouds do seem to be parting a bit, but there are still a lot of x factors—which is exactly the reason this could turn out to be a very good call.

(New York)

Stocks are off to a very strong start this year, but it is hard to remember a time that they looked so vulnerable. Investors may be happy with the 10%+ gains in the S&P 500, but the reality is that stocks could nosedive at any moment. In a sign of how grave the risk is, we challenge you to ask yourself—what is a risk that could make stocks plunge 10% in a day? We are willing to bet 90% of you said “the Fed suddenly restarting hikes”. The core of this rally has largely been predicated on the Fed suddenly reversing course, letting investors breathe a sigh of relief that the central bank won’t hike the economy into recession.

FINSUM: The truth is that the Fed could reverse its position at any moment, which would probably cause a big downturn in markets. That said, we don’t think they will do anything so drastic.