Stephen Dover: So, at the end of last year, rolling into this year, you wrote and said this year, 2022, is going to be a year of volatility both in the economy and markets. And here we are, and that’s where a lot of questions are. Give us some framework of the volatility we’re seeing and what you see ahead.
Wylie Tollette: I always like to think of the capital markets and stock markets in particular really being affected by two big things. The first: fundamentals, data, inflation, interest rates, corporate profits and earnings. The other thing they’re affected by is human behavior, and because of the human behavior element, they tend to go further. They’re like a pendulum. They go further on the positive side when things are looking good, they go further than they really should. And then they tend to go more negative than they really should on the negative side. They spend almost no time at what might be perceived as a perfectly rational or efficient point. And last year, we saw things go too far in the positive direction with the reopening trade, and we saw tech stocks kind of get way beyond their earnings expectations, if they even had earnings. We saw a lot of different assets really rise—Bitcoin comes to mind. And now we’re seeing the tide go out the other direction. And once again, we expect that pendulum to go a little too far on the negative direction. I don’t think we’re all the way there yet, but it’s expected, this volatility is to be expected when you have so many different economic elements sort of in flux right now in the global marketplace.
Stephen Dover: So, Wylie, I mean, we just haven’t seen volatility as we’ve seen right now. We see volatility in equities, of course, but volatility in fixed income is even higher than equity. So traditional bonds helping out when equities are down doesn’t seem to be working right now.
Wylie Tollette: Yeah, that’s exactly right, Stephen. And you and I are both blessed to be old enough to remember the last time we saw fixed income volatility approach equity market volatility, it was back in the late 1970s and early 1980s. We were both just kids of course. But it was really the last time, and it’s to be expected when inflation rates climb, bond prices and yields are a component both of the yields that the government can help determine, like short-term yields, fed fund rates, and inflation expectations, longer-term inflation expectations. So, because bond prices and yields have these multifactor components, we’re seeing the inflation expectations be quite volatile and basically going up recently. That’s driving bond market volatility, and the Fed [US Federal Reserve], which has for really the last 15 years in particular, but perhaps even longer than that, been very supportive of financial markets in terms of lowering rates overall. We’re seeing the Fed shift direction. So lately, they’ve been raising rates of course. So, both elements of bond prices have been volatile and changing. That’s why we’re seeing fixed income sort of lose its status as a diversifier recently. Last time we saw that, again, back sort of mid-1990s for a short stretch, 1994, 1995, and then prior to that, in a dramatic way, in the mid-1980s. So, I think investors, again, need to think about adding additional elements of diversification beyond fixed income. Fixed income has been a great diversifier for equity risk for roughly the last 35 years, but in environments like this, you need other things to diversify your portfolio.