Commentary
Watching a segment on the business network CNBC the week before Easter, I was struck by what the late baseball great Yogi Berra called “déjà vu all over again.” For what that network’s anchor Bob Pisani was describing was a crisis of confidence—but then an epiphany in my own case—yours truly experienced over 40 years ago as I began my own career.
Pisani was covering the Exchange ETF Conference at the Fontainebleau Miami Beach. The reported 2,000 or so elite investment advisers and other financial professionals were at what was billed as the largest such conference for the enormous ETF industry in the world.
Advisers Were ‘Terrified’
These elite investment professionals, Pisani said, felt in a state of “shell shock.” For so long—and certainly since that deep but brief market bottom at COVID’s onset in early 2000, after which the Federal Reserve really opened the monetary flood gates—they seemingly could do no wrong. In recent years, most of these types have sought to manage their clients’ accounts with the easiest strategies possible; hence the huge growth of ETF’s (Exchange-Traded Funds) of all kinds. And with little exception, these advisers have been able to follow a “passive” strategy of simply putting their clients’ money in plain vanilla stock and bond ETF’s—and let the Fed do the rest.But that approach has been dramatically upended in recent months. What had been hot no longer is. The broad stock market has peaked; and perhaps for quite some time to come. Typical passive strategies that have lost their clients and advisers anywhere from 5–15 percent of their accounts’ worth so far in 2022 will continue to be losers, in my opinion.
Even the components of recommended portfolios crafted by these sorts in “safe” bond portfolios have been upended. As market interest rates have spurted upward back to their highest level in several years, the value of bond portfolios has dropped also.
This all hit home to me in spades as I watch watching Pisani’s report. For yours truly, it seemed a repeat for them of what I went through at the beginning of my career, which started in 1979.
Back then, a weakening dollar, Fed money printing through the 1970s by then-Chairman Arthur Burns, and the rest had caused commodity prices of most kinds to soar. Long a “relic,” gold—rendered a marketable monetary asset by President Richard Nixon in 1971—soared at one point to near $900/ounce, after its decades-long fixed price of $35/ounce was abandoned. Oil, real estate, agricultural commodities, you name it: everything went up.
Part of the strategy of the firm I started with was to therefore put our clients in one particular mutual fund that decided to load up on these areas. Back then, this was an oddity; of the very small number of funds around in those days relative to now, there was still no such thing as “sector” or thematic funds for the most part. But for this fund, their getting heavy into stocks of companies involved in commodities paid off. In 1979 it rose in value by over 30 percent; and by more than 60 percent in 1980. It led virtually all its peers.
But soon, rather than kudos from my own clients I had put in these funds, I was getting concerned calls asking me, “Chris, what should we do? Why is this going down now?” And the most helpless feeling in the world to a young, idealistic financial planner was to answer “I don’t know.”
In retrospect, we all should have seen this coming a mile away. When then-Fed Chairman Paul Volcker slammed on the brakes, raised interest rates, and sent the dollar soaring, these hot commodity and related plays had to fall—and they did. Hard.
But the average planner—adviser—or whatever one chooses to call themselves is even more a “herd follower” than are investors themselves. As I was until my own early epiphany forced me to look behind the curtain, most are actually discouraged from worrying about how the Fed works, the predictable consequences of its actions, etc. It’s an industry concerned with acquiring assets under management and selling products. Thinking outside the existing box—even now, with MAJOR changes afoot as was the case in 1980—is discouraged. Just sell products and our management services.
The “disinflationary” period that pretty much marked the four decades since Volcker’s first abrupt policy change is now OVER. Successful strategies for individual investors and advisers alike must acknowledge this as well as take the present Fed strategy seriously.
Lastly, if you have an adviser who cannot articulate a game plan to deal with the irreversibly changing landscape we have before us, look for another. And that goes double if the answer to you is (like that to me 40-plus years ago when I was trying to make sense of things) “Just ride it out. Don’t try to time the market.”
