Strategies for Professional Investors to Navigate Market Volatility

Macroeconomic Analysis

Macroeconomic analysis reveals the inherent uncertainty in forecasting conditions, as highlighted by JPMorgan Chase. Firms like Bank of America and Goldman Sachs use sensitivity analyses and various economic scenarios to manage risks. Amazon's experience with inflation and consumer uncertainty underscores the importance of adapting strategies to navigate market volatility effectively.

"Recognizing that forecasts of macroeconomic conditions are inherently uncertain, the Firm believes that its process to consider the available information and associated risks and uncertainties is appropriately governed and that its estimates of expected credit losses were reasonable and appropriate for the period ended March 31, 2024." --- (JPM, sec filing, 2024/Q1)

"The sensitivity analysis in Table 41 assumes that we take no action in response to these rate shocks and does not assume any change in other macroeconomic variables normally correlated with changes in interest rates." --- (BAC, sec filing, 2024/Q2)

"These scenarios cover short- and long-term time horizons using various macroeconomic and firm-specific assumptions, based on a range of economic scenarios." --- (GS, sec filing, 2024/Q2)

"During 2022, we faced a number of challenges. We saw prominent macroeconomic headwinds as the world adjusted to life post COVID, including the highest levels of inflation we've seen in Amazon's history and an overall uncertain consumer environment." --- (AMZN, event transcript, 2024/05/22)

"Recognizing that forecasts of macroeconomic conditions are inherently uncertain, the Firm believes that its process to consider the available information and associated risks and uncertainties is appropriately governed and that its estimates of expected credit losses were reasonable and appropriate for the period ended June 30, 2024." --- (JPM, sec filing, 2024/Q2)

Diversification Strategies

Diversification strategies are crucial for professional investors to achieve stable and growing revenues. BlackRock's acquisition of PreQuin aims to diversify earnings away from capital markets. Morgan Stanley and JPMorgan Chase emphasize the importance of varied revenue channels and business types, while Goldman Sachs focuses on providing clients with diversified return streams.

"For our shareholders, we believe the PreQuin acquisition will bring revenue and earnings diversification less tied to capital markets activity. Through strong organic growth and scaling of our private markets and investment technology platforms, both of which fuel stable earnings growth, we believe we can drive multiple expansion for our shareholders." --- (BLK, M&A Announcement, 2024/07/01)

"We have the workplace, we obviously have the advice-based relationship, different pieces of stock plan, et cetera that come in through the channel and there is diversification there." --- (MS, earning call, 2024/Q1)

"On the left hand side, you see the benefits of diversification. Different revenue types and businesses produce stable and growing total revenue." --- (JPM, Investor Day, 2024/05/20)

"The firm has distinguished itself through investing in compelling, often complex situations and providing clients with return streams that offer attractive potential returns and diversification from other credit managers, who are often more sponsor focused." --- (GS, press release, 2024/04/02)

"Our goal is to grow these assets to 10,000,000,000,000 dollars and beyond. The combination of scale and diversification in these businesses positions us well strategically for long term growth. Institutional Securities is a preeminent franchise with an extensive global client footprint and capability set." --- (MS, event transcript, 2024/05/23)

Risk Management Techniques

Professional investors employ various risk management techniques, including daily risk measurement methodologies (JPM), independent calculations of VaR and EaR (GS), asset-liability management (AIG), dynamic risk management (MS), and investments in risk capabilities and compliance programs (AXP).

"For risk management purposes, the Firm believes this methodology provides a daily measure of risk that is closely aligned to risk management decisions made by the LOBs and Corporate and, along with other market risk measures, provides the appropriate information needed to respond to risk events." --- (JPM, sec filing, 2024/Q1)

"Our market risk management systems enable us to perform an independent calculation of Value-at-Risk (VaR), Earnings-at-Risk (EaR) and other stress measures, capture risk measures at individual position levels, attribute risk measures to individual risk factors of each position, report many different views of the risk measures (e.g., by desk, business, product type or entity) and produce ad hoc analyses in a timely manner. Risk Measures" --- (GS, sec filing, 2024/Q1)

"The Life and Retirement companies use asset-liability management as a primary tool to monitor and manage risk in their businesses." --- (AIG, sec filing, 2024/Q1)

"Higher client engagement, dynamic risk management, and strength in Asia all contributed to performance." --- (MS, earning call, 2024/Q2)

"Importantly, as we've transformed and grown our business, we continue to make significant investments in strengthening our risk capabilities and our control and compliance programs as we strive to deliver on our promise to our customers and effectively manage the risks our business are exposed to." --- (AXP, event transcript, 2024/04/30)

Use of Derivatives for Hedging

Professional investors use derivatives to hedge risks by providing liquidity, managing cash flow variability, and securing firm stability. Major financial institutions like Goldman Sachs, Bank of America, and Morgan Stanley facilitate these transactions, while firms like JPMorgan Chase account for hedging gains and losses meticulously.

"As a market maker, we enter into derivative transactions to provide liquidity to clients and to facilitate the transfer and hedging of their risks." --- (GS, sec filing, 2024/Q2)

"It's a good question. One of the realities of starting this company with sophisticated hedging and derivative markets were that the target customers that we built the company around were large commercial and entities and even national entities around the world." --- (ICE, AGM, 2024/05/17)

"Specifically, we use those derivatives to manage both the variability in cash flows and changes in fair value of various assets and liabilities arising from those risks." --- (BAC, sec filing, 2024/Q1)

"But even there, you're going to transact because you're helping intermediaries and folks in the ecosystem market make or make many hedging bets to secure their firm, their enterprise." --- (MS, conference, 2024/06/10)

"The Firm includes the gains/(losses) on the hedging derivative in the same line item in the Consolidated statements of income as the change in cash flows on the related hedged item." --- (JPM, sec filing, 2024/Q2)

Sector Rotation Strategies

Sector rotation strategies involve shifting investments across different sectors to capitalize on market trends. Johnson & Johnson leverages its multi-sector presence, hedge funds are moving away from technology and utilities, and ExxonMobil focuses on competitive positioning in the energy sector. These approaches highlight diverse strategies to navigate market volatility.

"We have a track record of developing successful products with this approach.In evaluating opportunities, we also look at spaces that complement our existing portfolio and enable us to harness the power of our 2 sector company." --- (JNJ, event transcript, 2024/04/25)

"At the same time, hedge funds have been rotating capital out of technology and utilities to start the second half of 2024, dumping positions in high-flyers such as %Nvidia (NASDAQ:NVDA) and %SuperMicroComputer (NASDAQ:SMCI)." --- (CVX, press release, 2024/07/08)

"Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business." --- (MSFT, sec filing, 2024/Q4)

"So even in these markets that are set by other capacity, the work that we've done to position ourselves, more advantaged – in a more advantaged position in competition continues to deliver a value." --- (XOM, earning call, 2024/Q1)

"into our MedTech strategy and the growth opportunities we see for the business moving forward.Finally, Joe will cover the financial details and Shockwave's growth potential." --- (JNJ, event transcript, 2024/04/05)

Role of Technology and Data Analytics

Clients are increasingly prioritizing data and technology transformation projects, leveraging AI and analytics to drive productivity (IBM). MultiPlan customizes solutions using sophisticated technology and data analytics (Oracle). Microsoft's Intelligent Data Platform offers extensive capabilities in databases, analytics, and AI (Microsoft). AWS App Studio empowers rapid, secure application development (Amazon).

"Clients continue to prioritize large data and technology transformation projects focused on driving productivity with AI and analytics, which is also reflected in our year-to-year growth in Consulting signings this quarter." --- (IBM, sec filing, 2024/Q1)

"Leveraging sophisticated technology, data analytics, and a team rich with industry experience, MultiPlan interprets customers' needs and customizes innovative solutions that combine its payment and revenue integrity, network-based, data and decision science, and analytics-based services." --- (ORCL, press release, 2024/08/01)

"Now, on to data and analytics. Our Microsoft Intelligent Data Platform provides customers with the broadest capabilities spanning databases, analytics, business intelligence, governance, and AI." --- (MSFT, earning call, 2024/Q3)

"App Studio opens up application development to technical professionals without software development skills (such as IT project managers, data engineers, and enterprise architects), empowering them to quickly build internal applications that are secure and fully managed by AWS, eliminating the need for operational expertise." --- (AMZN, press release, 2024/07/10)

"We continue to see clients prioritizing large data and technology transformation projects focused on driving productivity with AI and analytics." --- (IBM, earning call, 2024/Q1)

Behavioral Finance Insights

Behavioral finance insights emphasize the importance of data-driven approaches to inform risk decisions and deliver valuable insights, as well as the need for well-positioned portfolios that understand underlying economics to avoid excessive volatility. Additionally, proactive plan designs, such as automatic enrollment and contribution escalation, can significantly enhance participant experiences and retirement outcomes.

"a data driven business to better inform risk decisions and deliver insights to both our clients and our bankers." --- (JPM, event transcript, 2024/05/20)

"And so people have the right portfolio, companies that are positioned well, understand the underlying economics of what's driving the outcomes and don't have excessive volatility will win." --- (AIG, conference, 2024/05/29)

"As participants face a volatile economic landscape, these insights are invaluable for plan sponsors and financial professionals aiming to enhance participant experiences and achieve stronger retirement outcomes." --- (JPM, press release, 2024/07/24)

"We have dedicated teams focused on empowering and enabling our bankers. We're building a data driven business to better inform risk decisions and deliver insights to both our clients and our bankers." --- (JPM, Investor Day, 2024/05/20)

"The power of proactive plan design: 63% of participants acknowledge they are not saving enough for a financially secure retirement. High favorability towards automatic enrollment and contribution escalation, with nearly nine out of 10 participants supporting these features. Strong interest in target date funds, with 89% of participants finding them appealing. Plan sponsor implications: utilize automatic features to increase participation and contribution rates and given the strong interest, consider defaulting into target date funds. Insights into retirement income:" --- (JPM, press release, 2024/07/24)

Liquidity Management

Professional investors can navigate market volatility by focusing on robust liquidity management strategies. Key approaches include meeting cash flow and collateral requirements under various conditions (BAC), addressing liquidity needs during stress events (GS), and integrating liquidity management into the commerce cycle (C). Additionally, active liquidity management and strong liquidity positions are crucial for sustained growth and risk management (BLK, WFC).

"Liquidity Risk Funding and Liquidity Risk Management Our primary liquidity risk management objective is to meet expected or unexpected cash flow and collateral requirements, including payments under long-term debt agreements, commitments to extend credit and customer deposit withdrawals, while continuing to support our businesses and customers under a range of economic conditions." --- (BAC, sec filing, 2024/Q2)

"Liquidity Risk Management Overview Liquidity risk is the risk that we will be unable to fund ourselves or meet our liquidity needs in the event of firm-specific, broader industry or market liquidity stress events." --- (GS, sec filing, 2024/Q1)

"Simply put, companies to open bank accounts, make payments to employees and suppliers, collect money and manage their cash to support these flows. Liquidity management sits at the center of the commerce cycle." --- (C, Investor Day, 2024/06/18)

"Our scale and active approach for clients around their liquidity management are driving sustained growth in our cash platform. BlackRock's strategy and platform evolution, they're rooted in our convictions about future client needs, about required investment capabilities, about technology, about scale generation." --- (BLK, earning call, 2024/Q2)

"We have strong capital and liquidity positions. As we're building many of our businesses, we have done so within a consistent level of risk appetite, and our business model and franchise value differentiates us from most of who we compete with regardless of the environment." --- (WFC, earning call, 2024/Q1)

Scenario Planning

Professional investors emphasize scenario planning by preparing for bear markets, incorporating stress scenarios into capital planning, and considering worst-case economic outcomes. This approach ensures they remain adequately capitalized and strategically positioned, even if unexpected market conditions arise.

"And does planning for that bear scenario, I mean, you did raise the dividend already, but does planning for that bear scenario maybe change how you're thinking in near term about capital return or are you No." --- (AXP, conference, 2024/06/12)

"in strategic planning. Asking for a report of human and social risks in conflict and high risk areas then is a way to include worst case scenarios in its processes." --- (JPM, event transcript, 2024/05/21-23)

"We incorporate stress scenarios into our capital planning process with a goal of holding sufficient capital to ensure we remain adequately capitalized after experiencing a severe stress event." --- (GS, sec filing, 2024/Q2)

"So in the scenario where the rates have to go up again, low probability, but not 0 probability, then we're going to have a recession. So we are obviously, we have our central case that is the soft landing scenario, but the recent detail, they are quite, quite substantial and everyone and we need to be as a company prepare for if we are wrong and the tails take place how we are going to position the company in a proper way." --- (JPM, event transcript, 2024/05/20)

"And the other thing I want to point out, because all of these questions about interest rates and yield curves and NII and credit losses, it's one thing to project it today based on what -- not what we think in economic scenarios, but the generally accepted economic scenario, which is the generally accepted rate cuts of the Fed." --- (JPM, earning call, 2024/Q1)