“You're gonna need a bigger boat …”
Roy Scheider, in “Jaws,” 1975
For me, Roy Scheider's famous line allegorically brings to mind the current state of the markets. While risk assets continue to rally, investors — much like their beleaguered counterparts from the fictional island of Amity — remain cautious, and indeed might be looking for a bigger, or at the very least a better, boat. Perhaps they seek a craft more suitably constructed to withstand the many macro risks circling just under the deceptively calm market waters — I certainly would.
While the market remains relatively tranquil on the surface, there is an increasing sense of trepidation — or uncertainty — related to potential threats lurking below. Macroeconomic concerns, including geopolitical hot spots, China's status and whether global GDP growth can be sustained, all pose legitimate problems for market stability.
Perhaps the most significant and pressing concern today, however, and certainly one the majority of market observers are keenly focused on, is the threat of rising interest rates in the U.S. … cue the John Williams score. Given the current market environment, particularly as it relates to fixed-income securities, rising interest rates could represent a metaphorical great white macro risk for portfolios not suitably positioned. “You know the thing about a shark, he's got … lifeless eyes, black eyes, like a doll's eye. When he comes at ya, doesn't seem to be livin'. Until he bites ya and those black eyes roll over white.” Indeed, when rising interest rates eventually do bite, some investors eyes might roll over white as well. Fortunately, the story does not have to end there, despite the fact a rise in rates is seen as an eventual certainty. There does exist a better boat, one constructed not only of equity beta and bond beta, but one built using a good amount of alpha also. I believe this alpha boat might fare quite well in a rising rate environment, perhaps even prosper.