Published December 6, 2019
Over the past two years, some might be surprised to find that real estate has been the best investment of the four typical “core” asset classes – stocks (domestic and international), bonds, real estate, commodities (in the form of gold here). This is consistent with declining interest rates as the Fed shifted from raising to lowering rates.
What’s somewhat unusual, however, is that ALL the major asset classes produced gains. Following that surprise, we would expect to begin to see divergence in performance at some point. If we look at the past three months, we are perhaps beginning to see a divergence that could hold as stocks have significantly outperformed other assets.
The more interest rate sensitive assets (which are also typically more defensive) – e.g. bonds, real estate, and gold – have begun to notably underperform. This may be a short-term phenomenon, or the beginning of something larger.
Another way to look at the possible shift in the market is to compare aggressive, stock-heavy ETFs with more conservative, balanced and bond-heavy ETFs. Doing so with a couple of asset allocation ETFs below also shows we might be on the cusp of a shift in market preference – toward more aggressive stocks and away from bond/defensive allocations.
The recent shift in the chart above certainly looks like the mid-2016 period when investors began moving money toward stocks. While stocks might not deliver the heady returns of 2017, it’s certainly possible that bonds will begin offering much less of a return than they have been. That idea would suggest that interest rates have bottomed and are likely to rise, or at least stagnate.
None of this discussion suggests stocks will provide a benign, one-way trip upward. We are merely following off some of our other recent notes in pointing out that the market appears to have changed its tune after a flat, uncertain summer period. How long this shift lasts, or even if it will hold at all, remains to be seen.
Stock investors endured the most volatile period in two months this week. Monday’s -0.9% loss came as President Trump reinstated tariffs on steel from Brazil and Argentina while a key gauge of U.S. manufacturing slid for the fourth consecutive month, reinforcing the view that the tariffs are having a negative impact on U.S. manufacturing. President Trump followed Tuesday with comments suggesting no near-term urgency for a trade deal with China, words in stark contrast to the market’s recent perception that a trade deal was likely before year-end. Trade-related stocks tumbled broadly, though they rebounded by day’s end to cut the loss to -0.6%. Tuesday’s loss was recovered Wednesday, however, after President Trump took a calmer tone on trade and oil prices surged on an OPEC agreement to limit production. Stocks added +0.2% Thursday in a quiet session marked by further calming words on the trade negotiations, this time from China. Friday brought the monthly jobs report. It was very well received with stocks pushing higher by +0.9%. The surprisingly strong jobs report seemed to further investor resolve that the economy was firming with recession fears substantially diminished.
Investors bought a selloff early in the week to bring stock indexes back with the S&P 500 (SPY) ending the week +0.18%. The Nasdaq 100 (QQQ) fought back from down almost -2% early in the week to finish flat at -0.05%. Small-cap stocks (IWM) showed some rare relative strength, following up on last week’s breakout, to close the week higher by +0.65%.
Warm wishes and until next week.