What If Fear Fades?

In my last column, I described a bearish scenario where the markets come to the realization that the monetary authorities are out of bullets. This was simply an exercise in critical thinking and doesn’t actually line up with our current forecast, and I did promise I would come back with a bullish scenario.

There are a number of ways to paint a bullish picture for 2013, but the one I will describe presumes that the most bullish thing in the backdrop over the last few years has been the level of fear. That fear can be seen in tangible measures such as the amount of money that has poured into bonds versus equity, or measures of confidence that have been rising very slowly off a low base. It can also be felt by talking with a large variety of clients, friends, and colleagues, and acknowledging that no one really buys into a story of improving growth. In my opinion, most believe that the majority of the rally off the 2009 lows has been driven by a smoke-and-mirrors policy that will end badly. We’ve been in that camp ourselves, and I think it’s probably the consensus.

But what if 2013 is the year in which fear fades from the backdrop? What if system risk in Europe dissolves, the U.S avoids a major debt ceiling fallout, and confidence returns to markets? What if CEO’s start spending again, and retail investors trade in all that money parked in very low yielding bond funds for stocks? In short, what if this is the year where fear is replaced by greed? Improving confidence, diminishing fear, and huge amounts of liquidity could lead to a blow off overshoot to the upside in equities.

As I pointed out in my last column, while bullish and bearish scenarios always need to be considered as we take a tactical view of the world, conviction is the necessary ingredient to allow us to invest in a very bullish or bearish manner. When we don’t have that high level of conviction – now, for example – we maintain a mostly neutral stance that utilizes sector rotation strategies to try to produce risk adjusted excess returns in our portfolios.


Rick Vollaro
About Rick Vollaro
Rick Vollaro, CPA, joined Pinnacle Advisory Group in 2000 and became a partner in 2008. He’s an active member of Pinnacle’s management and executive teams, and serves as the firm’s Chief Investment Officer (CIO). Rick has been featured in a variety of publications, including The Wall Street Journal, the Wall Street Transcript, IndexUniverse, and Standard & Poor’s MarketScope Advisor. A popular speaker, he appeared most recently at IndexUniverse’s “2012 Inside Fixed Income” conference and on S&P Dow Jones Indices “Where Are We Now?” webinar. He has a bachelor’s degree in accounting from Fairfield University and is a non practicing Certified Public Accountant.