The New “New” Alpha

Simon NoceraAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Picking the “right” stock is akin to betting on a game; not only must one pick the right team (beta), but also by how much (alpha).

It's undeniable that the most influential event shaping financial markets over the past few decades was the extraordinary and unprecedented decline in yields across major debt markets. This historic phenomenon is unlikely to be replicated in our generation – making it a once-in-a-lifetime occurrence and the job of asset allocator a lot more challenging going forward.

Valuation and earnings normally influence market performance. Valuations in turn are strongly tied to the long-term, forward-looking discount rate applied to earnings, which, in turn, is intrinsically connected to and determined by the prevailing long-term yields. In essence, the performance of financial markets is a delicate interplay between these crucial elements, with long-term yields being the anchor that guides the valuation of assets and, consequently, their performance.