The Freedom to Write Without Having to be Right

This morning I perused the front page of the Financial Times the old-fashioned way (i.e. by physically holding the newspaper in my hands rather than visiting the website) over breakfast in a NY hotel following a client dinner last night. I was struck by the juxtaposition of two articles. One was: ” ‘Fragile Five’ Fall Short of Taper Threat” discussed the exposure some BRIC countries and others have to a too rapid tapering of the Fed’s policy of QE. We all remember how last Summer’s mere mention of tapering by Ben Bernanke was felt disproportionately in the Emerging Markets.

Incongruously facing this article was: “Christine Lagarde warns of growing threat of deflation.” Clearly, deflation and too-rapid tapering are unlikely to occur at the same time, which just goes to show that even the FT sometimes practices that well used journalistic trick of warning of every danger (including the possibility of no danger) so as to be able to claim foresight when one of the forecasts takes place. The FT’s website, with its far more mobile layout, doesn’t position these stories side by side, but it did highlight for me the many concerns that still confront equity markets.

On a related topic, we’ve noted recently some persistent underperformance of low volatility stocks versus the S&P500. Over the past couple of months Consumer Staples stocks (as reflected by the ETF XLP, for example) are flat while the market itself is up 5%. It’s been a similar story for SPLV. The logical corollary is that high beta, more volatile stocks have been outperforming the averages, in a sign that active managers are increasing their market risk. I’ll stop short of making the obvious prediction that the market must, therefore, be vulnerable to a sell-off, because the data doesn’t necessarily say that. Such outperformance of one sector versus another can persist for quite some time, although ultimately mean reversion occurs and the process reverses itself. We just haven’t identified any reliable tool with which to predict the timing of a reversal. However, if we were journalists this story would be titled, “Outperformance of High Beta Stocks Signals Market Reversal” and, unburdened by the need to deploy capital in response to our opinions, we would eventually be proven right.

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