Trends Watch: April 5, 2018

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks to Ricardo L. Cortez, Co-Chief Executive Officer, Broadmark Asset Management LLC.

What is your outlook for alternatives?

We are very optimistic for the future of alternatives over the next five years. Over the last decade, the stock market has risen to new highs, with only minor corrections. Volatility has declined to the lowest levels that we have seen in many years. Likewise, bond yields have declined to levels not seen in a half a century and bond prices have been in a bull market for 30 years. From an investment perspective, there has been little need to do anything but buy and hold equity and fixed-income securities. However, since the beginning of 2018, we have seen a rather dramatic increase in volatility and we have seen more uncertainty in both the stock and bond markets. This is to be expected as the stock market cycle matures and as interest rates begin to rise. The buy-and-hold investment philosophy of the last decade will likely change in coming years and investors will be seeking alternative ways of managing volatility. Alternatives offer methods of using equity and fixed income securities in new ways that are independent of the general trend of prices. We believe that alternative investments will offer valuable tools for navigating the uncertain markets that we see in the next five years.

What is your outlook for the economy?

We still see good economic growth in 2018 and perhaps into 2019. Tax reform and less regulation are providing a basis for accelerated earnings growth. However, there are warning signs that we are in the late stages of the economic and stock market cycle. Unemployment has now fallen to historically low levels and the Federal Reserve is tightening monetary policy through hikes in the Fed Funds rate and shrinking its balance sheet. In addition, equity valuations, by any measure, are high. Our assessment is that the current levels of high valuation, coupled with a less accommodative Federal Reserve policy, will lead to a dampening of economic growth later in 2018 and 2019. This will likely lead to higher interest rates, a pause in the economy, and a corresponding stock market correction.

What keeps you up at night?

The Federal Reserve Board provided unprecedented liquidity to the capital markets following the 2008-2009 financial crisis. The Fed’s balance sheet tripled during this time. Given this high level of government debt, along with the economic stimulus coming from tax reform, a repatriation of overseas assets, and greater deregulation, we wonder where the Fed will be able to successfully manage a rise in interest rates in order to keep the economy from overheating. With equity valuations having reached their highest levels in a decade, and higher debt-funding costs as the result of higher interest rates, we see the potential for a more severe downturn in the economy unless the Fed is able to successfully navigate a soft economic landing. In this case, we believe that alternatives offer an excellent way to diversify a portfolio in order to guard against these risks.