February 5, 2014

Doug Kass on Risk and Contagion effects

Risk and contagion happen fast. Usually the crowd outsmarts the remnants, but we should always beware of turning points!

It is helpful, particularly in periods of complacency (and in aging bull markets) such as we faced late last year, to consider out-of-consensus surprises and events that could unexpectedly influence the markets.

Arguably, this whole global market downturn in January has been the outgrowth of complacency and that most were already in the pool -- in other words, progress was discounted in valuations (which rose an outsized 24% in 2013).

Consider the strong consensus views as we entered 2014:
-Japan, which is now down 8% year-to-date, is the best region in which to invest;
-stocks will outperform bonds;
-the rate of global economic growth will accelerate;
-interest rates will rise.

By contrast, the risk of contagion was an important theme in my surprise list for 2014 (see surprise No. 13 above); it was a risk that was ignored by many. Indeed, few risks were considered following the outsized market gains last year, a sentiment that is embodied in Adam Parker's quote below.

"The only thing people are worried about is that no one is worried about anything.... That isn't a real worry."
-- Adam Parker, chief U.S. strategist at Morgan Stanley