Havens increasingly rare as lockstep movements get more frequent
The benefits of diversification are clear on paper: investing in non-correlated assets or markets helps manage risks to performance that could arise when a particular area of investment plunges. But ask someone who’s watched markets over the past month whether that will work, and they may not be so sure.
The problem, as laid out in The Wall Street Journal, is evident in the S&P 500, whose 11 sectors have either risen or fallen together during 11 trading sessions in August — the highest incidence of alignment within one month since January 2016. Moves in commodities and global stocks have generally tracked those in U.S. stocks as well.
The circle of investors seeing signs of a U.S. recession from economic data points is still quite small. But tariff uncertainty among investors has prompted large market swings, which some analysts consider as symptoms of an economic expansion in its late stages.
“It really is almost like an ongoing, rolling bet on the odds of recession,” said Dave Donabedian, chief investment officer at CIBC Private Wealth Management. His firm is leaning to the bullish side with an overweight position in stocks, as he believes lower interest rates around the world — with the possibility of more Fed rate cuts and “creative accommodation from the European Central Bank, Bank of Japan, and People’s Bank of China — will support corporate earnings.
Many other investors are keeping the faith in stocks based on the steady consumer spending and strong services sector that’s driving the U.S. economy ahead of global peers. Even with the recent volatility, the S&P 500 has been up 15% for the year.
But the lockstep equity-market moves are just one point of concern for the bearish, recession-is-coming crowd. They also point to a recent yield-curve inversion; a pullback in consumer confidence; and Dow Jones Market Data showing that oil prices, international shares, and bond yields have traded in the same direction as U.S. stocks seven times this month.
“It’s very difficult to gauge where things are going,” said Fiera Capital portfolio manager Candice Bangsund. While she conceded that broad market sentiment is still “extremely fragile,” she is maintaining an overweight position in risk assets from a conviction that the U.S. economy will continue to benefit from consumer spending.
Other analysts take lockstep market movements and prevalent crowded trades, such as bets on popular technology stocks, as a signal that the long-drawn bull market’s vulnerability to a pullback. They fret over how an unwinding of momentum-based trade positions can swiftly drag down markets — a phenomenon that played a role in sharp market downturns last year.
A closer look at the trend of synchronized movements last month reveals a mixed bag of signals. Among the 11 trading sessions in August that had all S&P 500 sectors moving in the same direction, six involved a rise in each group. But it was also the first month since September 2011 that the index dropped at least 2.5% on three separate days, noted Bespoke Investment Group; on each occasion, bond yields, global stocks, and oil also fell.