We have just closed one of the most volatile years in recent financial memory, with 2018 marked by the looming threat of a trade war, stock volatility, and conflicting predictions from some of the top economic analysts. Institutional investors, who tend to make decisions for thousands, if not millions of people, have much at stake for 2019.

Questions to Ask

As you contemplate the decisions you made over the past year, you are likely asking yourself these five important questions--the answers to which will drive your strategy in the year to come.

  1. How will the trade war develop? Many institutional investors have turned their attention to growing markets, like China, as a source of potentially high growth, but the recent tariffs and rhetoric between the United States and China has suppressed optimism that these markets will develop. Over the past several months, we've seen rising and falling moods with regard to the threat of a bigger, long-term "trade war," so institutional investors will need to decide for themselves whether or not these fears are relevant, and just how big of a role they'll play in the near future. China and other developing markets remain significantly undervalued, and an important way to balance risk in your clients' portfolios, but if trade tensions continue or heighten, it could be problematic for your returns.
  2. Is the stock market overvalued? Speaking of returns, you'll also need to consider whether the stock market is truly overvalued--and just how overvalued it is. The P/E ratio of the average stock is significantly higher than historical norms would dictate, and in certain sectors (like tech), these numbers are even higher-inflated. Recent fluctuations in the stock market show that investors are exercising more caution which could possibly result in correction-like behavior. But would that correction be enough to guide stock prices back to normal values? Or are we seeing a trend toward a new type of "normal" for stocks? Either way, this should seriously impact institutional investor activity.
  3. Which tech tools are going to shape your strategy? Think about which tech tools you want to employ your strategy. AI and machine learning have had enormous breakthroughs in the financial industry, giving institutional investors and everyday consumers more in-depth data analytics tools and more intuitive UI with which to make financial decisions. For example, the tech startup Pagaya received $75 million in February 2018 in new debt financing to continue improving its machine learning algorithm designed to help institutional investors make smarter asset management decisions. Having the right tools in your arsenal will lead to smarter decisions, fresh insights, and a smoother experience when navigating the world of financial management.
  4. Will interest rates keep rising? The Federal Reserve has gradually increased interest rates over the past few years, after several years of keeping interest rates at or near zero, as a measure to recover from the economic recession of 2008. Later this month, the Federal Reserve is expected to increase rates a quarter point, to a range of 2.25 to 2.5 percent, and further increases are expected throughout 2019. If interest rates keep rising as predicted, it could impact the broader market, and if the Trump administration attempts to remove leadership in the Federal Reserve as a kind of retaliation, it could result in even more unpredictable volatility.
  5. How much risk are you willing to take? This is more of a personal question than an analytic one, but it's just as important to ask; how much risk are you willing to take for your clients and personal investments? This coming year is filled with uncertainty, so if you're concerned about the many unpredictable factors surrounding it, you may want to make more conservative plays. But if you're willing to engage with the fear, you may be able to see higher-than-average returns by capitalizing on the lower levels of competition.

Refining Your Strategy

These are not easy questions to answer, even for our most experienced economists, so don't be surprised if you can't land on a firm conclusion for any of these prompts. What's important is that you take this time, as we begin a new year, to reevaluate the decisions you've made in the recent past, and come up with a new strategy to help you in the coming year.