2016: Annus Ridiculum
January 18, 2017
As I was enjoying a year-end reverie, the term annus horribilis popped into my mind. I haven’t studied Latin and am always wary of things that smack of pseudo erudition, but fear not. The term is famously associated with Queen Elizabeth II as she was looking back on 1992, a year that contained an almost incomprehensible number of mostly salacious familial scandals. Clearly, the horrible year was very much a Royal point of view. It struck me that a fair number of folks are probably thinking of 2016 as their annus horribilis. Certainly, Secretary Clinton would be among them as would the usual world government crowd. This is, of course, very dependent upon your point of view, as Donald Trump and Nigel Farage would not see it this way. In my opinion, there is another term for 2016 that better sums up what transpired and has some potentially serious implications for the investing world. I dub 2016 annus ridiculum.
As you likely know, we have a healthy skepticism for consensus views and 2016 was no different. It’s not that consensus views are always wrong; far from it. But what made 2016 exceptional is that the consensus was so overwhelmingly wrong, failing to see the reasons why it was so wrong, and further, why it will continue to be so wrong. The shifts that gave us the Brexit vote and the Trump victory are tectonic in magnitude and hardly one-off or easily explained by Russian hacking or last-minute FBI disclosures. For further corroboration, look no further than the predictions that these two unlikely outcomes would be followed by market panic and severe declines. That markets welcomed both in an unequivocal manner was incomprehensible and highly troubling to the statist global government crowd. That the working class may be fed up with a fixed economic pie view of the world and is willing to take a risk to improve their lot is hastily and conveniently discounted. The job of Janet and her crew of bureaucrats just got a lot harder.
While 2016 ends with mostly excellent returns in stocks and solid but unspectacular returns in bonds, we believe the environment going forward is more fraught with peril. The status quo that has existed for almost a decade of low but steady growth, ultra-low interest rates, and de facto fixed exchange rates is coming to an end. Stocks are by most measures well above historical valuations. Interest rates, up from their lows, remain mostly unattractive. Volatility remains suppressed. Juxtaposed with this is a world in the early stages of a potentially significant change in policies that have allowed much of what we take for granted to be seen as normal. It wasn’t and isn’t normal. It was and is artificial and benefits only a small segment of the population (just look at the economic forum in Davos to see who they are). The new normal may be defined by policies consistent with a belief that the unconventional may be worth trying in order to break out of the somnambulant stupor we find ourselves in. Some may win, some may lose, some just might cause us to sing the blues, but it will be different.
Against this backdrop, we enter 2017 positioned cautiously. Bond market valuations remain unattractive even after the recent backup in yields. High yield and investment grade credit are, if not priced for perfection, clearly not priced for the environment in which we believe our economy and nation to be. Although we hold disdain for predictions, we feel comfortable offering this one: when we look back on 2017, we will think, “I wish I had seen that coming”.
Mark Egan, CFA
Managing Director, Reams Asset Management
Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Redwood Asset Management believe to be reasonable assumptions, Redwood Asset Management cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.