Investment Strategies

Guest Article: Interpreting The Gravitational Market Pulls Of Economics, Monetary Policies

Diane Harrison, October 22, 2014

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Diane Harrison considers what the workings of the tides can teach us about how global markets respond to their respective gravitational pulls of economics and monetary policies.

A regular contributor to the pages of Family Wealth Report, Diane Harrison is principal and owner of Panegyric Marketing, a marketing communications firm which is focused on the alternative assets sector.

Here, she considers what the workings of tidal waves can teach us about how global markets respond to their respective gravitational pulls of economics and monetary policies.  

The physics of tidal pulls present an interesting parallel to some of the market cycles the asset management world has found difficult to navigate over the recent past. Perhaps taking a closer look at the two forces—tides and money flows—might offer some insight into what lies ahead for investment managers and investors.

Going solar

Tidal flows are the result of the gravitational pull on the earth of the moon and the sun. When the gravitational effects of the sun and the moon combine, we get spring tides, which have nothing to do with the season of spring. The term refers to the action of the seas springing out and then springing back. These are times of "higher high tides" and "lower low tides."

A week later, during either of the two quarter moon phases, when the sun and moon are at right angles to each other and their tidal influences partially cancel each other out, neap tides occur. When the moon is in these quarter phases and counteracting some of the sun’s force, the neap tides present less extremes during high and low tides, and the tidal range is minimal. (Source: The Farmer’s Almanac’s website.)

With this understanding of how the gravitational forces of our solar neighbors exert their impact on the ocean tides over the course of each month, what can this tidal lesson teach us about how our global markets respond to their respective gravitational pulls of economics and monetary policies?

Economic versus fiscal factors

Investment strategies that rely on the classic market forces of supply and demand and the factors that influence their interplay have been stymied in recent years by the opposing forces of fiscal policy action, most notably quantitative easing and central bank actions, which have exerted their own influence on the markets to buoy prices and prevent an economic stalling.

Managers who employ strategies that seek to take advantage of traditional fundamental price action have been frustrated by the mitigating factors governmental actions have caused in the global markets. However, managers who have developed strategies that respond to incremental, short-term market movements and strategies that are market agnostic have found many opportunities to realize their objectives in recent years. Both strategic approaches have had opportunities to profit episodically, yet neither has found the global markets to offer sustained long-term opportunities for any singular approach.

Building an all-weather portfolio

To bring home the analogy between this and the tidal forces, opportunistic strategies perform better during spring tide cycles in the markets, while mid-market strategies succeed best during the neap tide cycles in the markets.

Investors who recognize the need to incorporate both opportunistic and middle-market movement managers in their portfolios can position themselves for a true “all-weather” portfolio construction.While nothing about the prior discussion is ground-breaking or new, it bears repeating that the best investment strategy for most investors is to embrace variety, where strategies and market exposures work together to deliver an overall target objective. This is the bellwether approach most wealth managers try to construct for their clients, while institutional asset managers do the same for their long-term objectives.

Investors owe it to themselves to learn more about the variety of market strategies that can perform in diverse market cycles and phases. The more flexible investors can be in constructing their portfolio with an advisor, the greater the likelihood that they will successfully navigate today’s markets to their long-term investment goals. 

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