The trend in February was again one of posting a wide range of results and a shifting pattern of winners and losers on a monthly basis. This isn’t a shock, but more of it is probably coming, meaning that a new set of challenges await for managing asset allocation relative to the trend for much of the past 12 months.
Last October, we considered a future with a wider divergence of returns: red as well as black ink sprinkled liberally across our monthly performance summaries. At the time, the trend du jour was one of handsome if not stellar gains in virtually everything on a monthly basis. That was all but certain to end at some point, and perhaps sooner rather than later. The great reflation of 2009 in asset prices, while reasonable and somewhat expected, was destined to run its course as the more challenging economic and financial era of the post-Great Recession period arrived.
This new era has been arriving now for several months, courtesy of the market’s efforts to digest a volatile array of news and trends that are often as confusing as they are potent. Indeed, as our table below shows, monthly total returns for the major asset classes were fairly wide last month, ranging from a strong 5.6% gain for REITs down to a 1.2% loss for inflation-indexed Treasuries. That’s almost a mirror reversal of January’s performance results at the extremes, with TIPS in the lead and REITs suffering a hefty tumble in this year's first month. (Click to enlarge)
Click to enlargeExpect more of this back and forth, with asset classes shifting positions in the monthly updates. This looks set to continue until a higher level of clarity on the future arrives. That's going to take time as the macroeconomic details of the new world order unfold, for good or ill. Indeed, there are numerous uncertainties lurking, some of which may pose substantial hazards to the cause of sustained economic growth. More often than not, debt is attached to these concerns, one way or another.
Governments the world over are pulling every trick they know out of their monetary and fiscal hats in an effort to combat the hazards that confront the global economy, primarily in the developed world of the U.S., Europe/Britain and Japan. For the near term, the prevailing winds in this epic battle will determine winners and losers on a monthly basis. Depending on the news cycle of the day, progress may appear to have the upper hand, only to give way to the forces of darkness. Lots of suprises are coming. Get used to it, and be patient.
It may be some time before the major asset classes again enjoy a bout of smooth sailing with easy gains in almost everything. Without the powerful tailwind of deep discounts that prevailed in betas a year ago, markets are likely to face a rough sea of volatility and trendless meandering in the months and quarters ahead.