Monday, November 2, 2020

The warnings from October - The end of the easy money bounce

The take-aways from October performance should generate concern for any investor.

  • Stock (SPX -2.66) and bond (Agg -.17) benchmarks were both negative for the month. The normal bond hedge was not effective. The returns for bonds are worse when using Treasuries index over Aggregate.
  • The 3-month return for a 60/40 stock/bond  (.37/-.97) portfolio return was negative by -.17. The base asset allocation position did not lead to positive returns.
  • The strategies that have worked this year are showing signs of investors exiting. Information technology was down 5.10 percent and growth, quality and momentum were all negative respectively -3.08, -3.75, -4.17 percent for the month. These were the strategies that investors profited from after the March crisis.
  • There is still no return protection from holding low volatility (-2.87 for S&P low volatility index) but there were October gains for those investing in utilities.
  • The yield curve has steepened with long Treasuries, corporates and high yield all generating negative returns for the last three months. This has occurred even though there has been no change in Fed policy.
  • There is no protection through international investing in developed equity markets with Europe equity benchmarks all lower than the US. Some protection existed for investors in emerging market equities or Asian stocks over the last three months. 
  • Commodities were down for the month based on downward revised expectations for energy markets. 
While there has been talk about US election uncertainty increasing on a perceived decrease in the gap from polls between Biden and Trump, the real driver is the COVID19 bump. The daily increase in positive tests versus total new tests taken is at level near the end of June. Broad brushed, countries with increasing daily case counts are seeing asset price declines. Countries with limited increased counts in Asia or EM have held value. A COVID increase will delay any further recovery and will  likely lead to a reversal of economic growth.

1 comment:

Grzegorz said...

Hi Mark,
What would you recommend as protection assets since bonds are not working now. Could it be TIPS?