April has come to a close. After celebrating financial literacy all month, it’s time to extrapolate what we’ve learned to what’s happening today. That means checking in on asset class performance.
To be very clear: there is often a lot of disagreement over what constitutes an asset class. There is also frequent disagreement over the best ways to measure the performance of an asset class during any given time period. This is intended to be a snapshot of some of the most common asset classes in American portfolios today (which, yes, includes crypto now) by using reputable indices, funds, and ETFs to help us look at the big picture (see below for sources).
The exception to that rule is the inclusion of hedge funds. The average investor, unless they have allocation to a fund tracking an index or basket of fund allocations, probably cannot access a direct hedge fund investment due to minimum investment and available capital requirements. In some cases, the funds may be closed to new investors altogether. However, given that they are arguably one of the largest alternative investment groupings in terms of assets under management and overall market size that can be reliably tracked in any way, we decided to include them in our tracking.
Your exposure to said asset classes may be the same or different as others like you. And it should be noted that this data is not intended to be any kind of financial advice and that different kinds of investments carry different risks which may not be appropriate for every investor.
This is just information. What you choose to do with it is ultimately your choice.
So whether you’re investing on your own, looking for insights that can help facilitate conversations with your financial planner, or are just plain interested in the numbers, this is where we stand as March rolls along.
Some of the most consequential headlines in April pertained to the integrity of the domestic and global banking system. Following the collapse of Silicon Valley Bank (SVB) and Signature Bank in March and the emergency bailout of Credit Suisse by UBS, the bank to watch was First Republic. As of Monday morning, the FDIC seized the bank, with the bulk of its assets acquired by JPMorgan Chase.
JPMorgan’s stock shot up on the news, but concerns regarding the banking system persist. Though the S&P 500 Financial Index made gains in April, it’s still down more than 8% from its March highs.
But the banks in question are not the only ones vulnerable. JPMorgan’s own analysts estimate that regional and community banks have seen more than $1 trillion in outflows following the SVB collapse. Such banks play a crucial role for small businesses in need of capital, so sustained sector price instability in this space poses significant risks to entrepreneurs and investors alike.
Much ink has been spilled (and will continue to spill) on the reasons for SVB’s collapse and subsequent turmoil in the market. The Federal Reserve’s recent report on the saga reflects the complex web of culpability in these situations. Boards of directors aren’t holding executives to account. Executives are not effectively managing liquidity and interest rate risk. Regulators have failed in terms of vigilance and aggressiveness.
Experts quickly pointed out that this is not like 2008. They argue that this iteration of a banking crisis has been contained, standing in stark contrast to the contagion that spread like wildfire through the financial sector in 2008. They could be correct. But uncertainty sets the stage for enhanced volatility driven by headlines. In the current economic climate, that’s something most investment portfolios can ill afford.
As expected, the Federal Reserve announced another rate hike last month. Another hike is widely expected on Wednesday, pushing rates to a 16-year high.
But more important than the hikes themselves will be how it is communicated. Despite expectations that the hikes would cool after May, experts now predict that more dot the horizon. Fed Chairman Jerome Powell’s words will be closely scrutinized in an effort to gauge market directionality. His statements will hold more significance than usual, as any signaling of persistent hikes will fly in the face of investor expectations.
While the digital age has resulted in markets “baking in” likely economic data well ahead of their announcement, that wouldn’t be the case here. But market expectations here don’t make a lot of sense. Historically, rate cuts tend to come about when volatility quickly and significantly spikes due to geopolitical shocks or an all-but-certain recession. Given that the economy is still running too hot, market volatility is historically low, and inflation remains well above the Fed’s target, rate cuts should never have been expected in the first place. The Fed has been trying to tell investors this, affirming time and time again that additional “policy firming” (read: rate hikes) may be required to effectively fight inflation.
The issue at hand is whether the Fed signaling further hikes in the future will lead to a spike in volatility. Despite recent low volatility levels, uncertainty has a bad habit of cranking things to 11. Should the stock market lose its mind over Wednesday’s statement, uncertainty will take the wheel. This tends to keep cash on the sidelines, which uniquely hurts growth stocks. The resulting decrease in volume makes volatility spikes more likely. That does not spell long-term disaster, but it certainly merits monitoring.
While investors parse rate hikes relative to stock value, consumers are feeling the trickle-down consequences of hawkish monetary policy. The housing industry serves as an excellent example of what that looks like. Concerned about rising mortgage rates, homeowners aren’t selling, preferring to stay locked in at their current rates, and prospective buyers aren’t comfortable with current interest rates on loans, anyway. As of March, existing home sales were down 22% from the previous year.
New home sales increased in March, and the Housing Market Index rose in tandem, demonstrating stronger builder confidence. But new home building starts are down and ongoing supply chain headaches will continue to stymie development as interest rates diminish builder access to financing. In the meantime, the new home sale cancellation rate, while decreasing, is still almost twice as high as typical rates.
All of these trends are seemingly baked into the real estate market writ large, with the asset class dipping 9% in 2023 so far. Does that mean the housing market is about to crash? Experts say no, but believe a moderate drop is likely. Lower delinquency rates in March certainly provided reason for optimism, but should mortgage rates continue their Fed-fueled uphill climb and delinquency rates increase, the housing market could be in more trouble than we’d hoped.
We would be remiss to not acknowledge the massive cryptocurrency run unfolding. With gains of 56.8% in 2023 so far, the performance certainly deserves at least a nod.
But as is often the case, everything is relative. Those gains look impressive until you look backward. Using the S&P 5000 Cryptocurrency Broad Digital Market Index as a proxy for crypto, we see that performance so far in 2023 is a drop in the bucket compared to losses sustained over the last 18 months. After hitting a high in early November of 2021, the index went into freefall. About a year later, it had lost a whopping 78%. It may have made gains since then, but it’s still down 63% from its 2021 high.
The problem with this run (or any run in any direction in crypto) is that it is as predictable as it is durable… which is to say, not at all. It’s why crypto is often considered a game for traders – not investors. Its massive drawdowns don’t jive well with sound risk management.
Correlation levels between asset classes continue to remain important. Generally speaking, certain asset classes have historically, somewhat consistently, had inverse or positive correlations to one another. If you look at correlation levels so far in 2023, things feel a little out of whack. In the correlation matrix below, bright green represents a strong positive correlation while red represents a strong inverse correlation.
What’s interesting here is that while we’re not in a 2008-style risk-on/risk-off economic climate – where everything went down at once. That doesn’t mean market dynamics are in line with historic correlation levels. Right now the closest we have to a non-correlated asset class (read: a correlation level of zero) is bonds. The dollar comes close, but its negative correlation with equities is still pretty pronounced. Otherwise? Everything seems to be in lockstep.
This poses challenges to investors hoping to maintain a diversified portfolio. Balancing a portfolio across asset classes according to available capital and risk tolerance only makes sense if those asset classes perform in diverse ways. That’s not been the case so far this year. Should recession fears come to fruition, these dynamics will exacerbate the downturn.
April might have brought financial showers to investors, but only time will tell whether May will give them flowers full of positive returns. We’ll be paying close attention to how the markets react to the upcoming Fed announcement, but we’re also looking to see how things move in consumer spending, consumer sentiment, credit card debt, and delinquency rates. Reports from April will inform movements in May. We can only hope there’s a garden of upside sprouting up.
See additional Financial Poise asset class performance analysis here.
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©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
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