Systemic risk is a concern that all investors, no matter what their investment strategy, must take into account when making trading decisions. In the last few years, we’ve seen systemic risk become a larger driver of market volatility, with stocks tending to rise and fall with larger economic issues than with fundamental changes in the company’s value.For most institutional investors, this is disastrous, and may be one driver behind the declining performance at many funds in the past half decade. It has also caused a boom in macro-driven funds at many institutions, and may inspire more capital to flow into funds following these strategies in the long term. That is, if retail investors can shake off the phobia of equities that has caused volumes to decline since 2008.
One of the problems of macroeconomic risks is that they frequently change and can, from the investor’s standpoint, hit a portfolio seemingly at random. Every year, the systemic issue changes. In 2008 and 2009, it was the subprime mortgage crisis and the falling consumption in the U.S. that resulted. In 2010, the European debt crisis, combined with high unemployment and low or negative growth in many European countries, dragged on equities, and continued to be a cause for marketwide dips throughout that and following years. Even now, Europe remains a laggard and a risk for investors, no matter where they live.
In 2011 and 2012, the inability for American policymakers to agree on a budget, combined with flirtations with defaulting on American sovereign debt, caused seasonal dips that were eerily regular. So regular, in fact, that “sell in May and go away” became a common refrain amongst investors, and the trend became a real strategy for a small but growing number of investors.
In early 2013, the bond market was the source of major volatility. Paradoxically and confusingly, a seemingly recovering U.S. economy caused stocks, and more notably bonds, to drop in May and June particularly as investors feared that quantitative easing would stop and aggregate economic demand would fail to keep equities afloat. Sell in May and go away became the mantra again, but a slight summer recovery then suggested the refrain was premature.
Then there was Syria. With worries of a U.S.-led military strike that was opposed by Russia, and stocks saw some unexpected volatility from a new and unexpected source. And then this week, just as swiftly as the crisis came, it seemed to disappear. With Obama postponing Congress’s vote on a strike and Russia and China coming to a somewhat terse agreement regarding Syria’s chemical weapons, it seems that the disruptive military strike would not actually happen. Stocks climbed higher.
And that leads us to today. Anyone investing in companies that provide value for customers and shareholders alike is bound to be frustrated at these curve balls. But they’re part of the game, and a savvy investor is defined by his or her ability to see these curve balls coming, and striking a home run when the time is right.