11/30/2018 Weekly Update: Assets Under Pressure
by Zach Marsh on Nov 30, 2018
S&P 500 +4.7%
10 Year Treasury +0.54%
Weekly Update: Assets Under Pressure
An article from the Wall Street Journal this week highlighted a study by Deutsche Bank which showed that of the 70 different asset classes tracked in the study, 90% of them were down for the year. While the 90% number may be surprising, more shocking is that it is the highest reading that the Deutsche Bank study has ever recorded. By comparison, in 2008 the number of asset classes in the red was only 68%. During the 2001-2002 bear market, those numbers were 54% and 31% respectively. In fact, for the next highest reading you would have to go all the way back to 1920.
This may seem shocking to many U.S. investors, whose focus is generally directed towards the U.S. stock market, and more narrowly at the Dow Jones Industrial Average. In fact, the extent of the gloominess has sort of snuck up on nearly all investors. The article quotes, Thomas Poullaouec, head of multasset solutions at T. Rowe Price, “It hasn’t felt like a bad year, but retrospectively, it’s been a pretty miserable year.” Following the robust markets we’ve experienced from June 2016 through January 2018, and more broadly since 2009, it seems as if we’ve been living in a perma-bull market; a bull market that is impervious to any and all negativity. During this bull market, beginning in 2009, when the slightest correction takes place, investors, aided by the Federal Reserve’s accommodative policies, immediately step in to buy into the price decline. But something changed this year which has gone somewhat unnoticed if our attention has been uniquely focused on U.S. stock market indices—buyers have lost their conviction.
Perhaps the lack of conviction can be traced to the Federal Reserve’s interest rate policy. Until October the market had grown accustomed to the regular rate hikes in place since mid-2016. But on October 3rd, Jerome Powell, the Fed Chairman, said that current interest rates were still a long way from “neutral.” The market did not digest this news well. Hoping that there would be a pause in the rate tightening policy in the near future, the stock market began to sink, and by October 29th the S&P 500 had fallen over 10%. This Wednesday, Powell changed his tone, saying that the current level or interest rates is getting closer to the range of neutral. The market celebrated this change of tone by sending the Dow up over 600 points. Ultimately, the market would appreciate the Fed adopting a more “wait and see” attitude; holding off on rate hikes until it sees how the economy is digesting them—frequently called “data dependency.” The longer-term effects on the stock market, as the Fed shifts towards data dependency, will, ultimately, depend less on what Jerome Powell says and more on what the economy does.
This brings us to the second issue overhanging the stock market: trade policy. The restrictive trade policy, along with a restrictive Fed policy, has caused the global economic expansion to screech to a halt. This weekend, members of the G-20 will meet in Argentina, should there be some forward momentum towards resolving these trade issues, we may well see a resumption of the broad-based asset rally that began back in summer 2016. However, should this trade war stretch into next year, it is quite likely that the market will suffer.
One positive note would be that, should the stock market stumble next year, it is highly unlikely that the bond market will struggle as well. As the article also mentions, this year is the first time in over 25 years that both stocks and bonds could finish lower for the year. Therefore, it is likely that even a down year in the stock market next year would be less problematic for multi-asset investment strategies, than the broad-based asset carnage we’ve experienced this year.
Thanks for reading,
Zach and Dave
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 Wall Street Journal November 25, 2018. “No Refuge for Investors as 2018 Rout Sends Stocks, Bonds, Oil Lower,” by Akane Otani and Michael Wursthorn.
  Wall Street Journal November 25, 2018. “No Refuge for Investors as 2018 Rout Sends Stocks, Bonds, Oil Lower,” by Akane Otani and Michael Wursthorn.