Asset Classes: There’s Nowhere To Hide

If you feel like it’s been a tough year in the market, you’re not alone. In 2018, virtually no asset class has provided safety. At -3%, US equities are down less than many other asset classes. Developed market equities have slumped 16%, similar to emerging markets equities (-17%) and energy (-15%). The Trump Administration strategy of using tariffs to alter terms of trade is blamed for growing concerns over global growth. The U.S. economy’s huge domestic market renders it less affected by trade than most others. Nonetheless, lower global growth is having an impact.

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No Place to Hide: Asset Classes Down in 2018

In a startling survey, CNBC found that almost half of U.S. corporate CFOs expect a recession to begin within twelve months. 82% expect a recession within two years. One doesn’t normally consider Federal Reserve members wildly optimistic, but in September they revised their 2019 GDP forecast up modestly (from 2.4% to 2.55%). Although they expect a slowdown by 2020, they’re still forecasting around 2%. The Fed is more bullish than corporations.

Bonds have not provided any protection either this year, with returns of -3%. Unusually, about the only asset class to provide positive returns is cash. The last time this happened was 1969.

The recent sharp drop in stocks has led to fund outflows. Last week’s $39 billion pulled from global equity funds was a record, and it was accompanied by $8 billion in withdrawals from investment grade bonds. Asian stock and bond funds are on track for their first year of net outflows since the 2008 financial crisis.

For a while, rising interest rates were felt to be the biggest threat facing the economy. The Fed is still projecting short term rates of around 3.5% next year, but the recent market turmoil has lowered ten year yields back below 3%. Two year yields of around 2.7% show the market thinks rate hikes next year are unlikely.

The Fed continues to unwind its balance sheet.Beginning with $10B/month in the fourth quarter of last year they’ve increased the pace to $50B/month as quantitative tightening is now in full swing.

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