“Snow in April is abominable,” said Anne. “Like a slap in the face when you expected a kiss.”
L.M. Montgomery, Anne of Ingleside
April has been a cruel month indeed in the Mid-West. A carousel of snow, freezing rain, and sharp wind gusts downtown have scuttled the winter sports calendar (at least for girls high school soccer) and this morning I heard that the phase has been termed “Sprinter”.
Markets also seemed poised to deliver a slap in the face at the beginning of the month, although have eased now as the month has progressed and rhetoric has softened or at least been offset by strong earnings. In fact the market just delivered its seventh day of gains out of the last 11 sessions and the effect of tax cuts has been in evidence as earnings are released across a range of sectors. Financials have also benefited from increased trading activity as volatility has increased over the first quarter and year to date.
But it might be fair to say that many institutional investors are still reeling from the slap in the face rendered by February and March in equity markets, which left most equity indices negative on the first quarter, particularly in Europe. While Emerging Markets have remained more resilient for the most part, the accentuated geopolitical risk in areas such as Russia, China and the Middle East may distort an otherwise robust fundamental picture in many markets. It has been a time to take stock, a reminder of the supreme importance of careful and disciplined re-balancing across equity portfolios and a test for active managers whose “calling card” is capital preservation in down markets.
Fixed income investments haven’t been in “shock” mode (rather a slow bleed) as the latest US interest rate moves are factored in. This may be less a time for playing for outsized gains and more an opportunity to play defense as the year rolls on. We are hearing about a flattening yield curve and opportunities to stay long at the long end as well as surprise at the recent resilience in high yield.
Last week I chaired a panel on currency investments at an institutional investor forum and we discussed the puzzle of enduring low volatility in currency markets even as volatility had resurfaced in equity and fixed income markets. This week that low volatility presumption seemed to be upended as the Ruble fell by 6.8%, the Turkish Lira lost over 1% and the GBP rose to its highest level against the USD since Brexit. With currencies now in the mix in markets’ newly volatile status quo, institutional investors need to implement a form of 360 vision as we move through the second quarter. With no pocket of the portfolio necessarily insulated from sharp moves all will require our full attention in the months ahead.