By Ven Ram, Bloomberg Markets Live analyst and commentator
In the past few years, you could have closed your eyes and gone long beta.
Preferably even higher beta if you felt a bit more adventurous. And the markets would have rewarded you with returns far, far higher than even your rose-tinted marketing material could have possibly projected.
Fast forward three weeks into the new year, and those portfolios and closet-index trades have taken it on their knuckles.
Given Monday’s stock rebound, the mood may have turned again for now, though traders may prefer to revive their best bets -- short or long -- after the Fed has spoken on Wednesday. However, whatever the color of their trade, it’s clear that the coming months and years will belong to those who have done their homework, back that up with conviction, have the guts to drown the incessant noise thereafter and hold their poise.
If you rewound life back to say, 2019 -- or any other year before the pandemic for that matter -- you had little by way of (officially recorded) inflation, no tensions surrounding Russia and Ukraine and certainly no uncertainty to the broader macroeconomy stemming from possible variants. Now, each one of those has to be accounted for: will inflation in the U.S., already running at 7%, head even higher as crude prices threaten to push toward $100 a barrel, or will the numbers go mellow from the second half? Will geopolitical tensions spill over into a full-fledged confrontation, cause even more supply bottlenecks and send commodity prices a-soaring as colleague Jake Lloyd-Smith notes?
You could possibly solve for all those variables and arrive at a Grand Theory of where the Fed will be a couple of years down the line and what that means for asset prices -- though you would run the very real risk of supplanting simplicity with complexity and false precision.
As Benjamin Graham counseled Warren Buffett, “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
And if your conviction is high that your reasoning is right, sit tight and let your alpha do the work for you -- chances are, you will stand out from the crowd and come out smiling.