Asset Class Performance Review for February 2023

March is here with the promise of spring around the corner. But just as somewhat bizarre winter weather nationwide makes that prospect seem lightyears away, the performance of various asset classes so far this year may have investors feeling chilly, too. 

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.

Housing Uncertainty Paints a Concerning Economic Picture

This year is off to a rough start, with most asset classes in the red year-to-date. The majority of the struggling classes extended January losses last month, with real estate dropping the furthest overall.

This may be attributed to a series of rough data reports. As Yahoo! Finance recently pointed out, the seasonally adjusted Mortgage Purchase Application Index is at its lowest level since 1995, while the average 30-year fixed mortgage rate has jumped to 6.97%. But this data is at odds with reports of declining home prices and increases in new homes and overall pending home sales. For what it’s worth, homebuilders watching the market are optimistic, with sentiment readings jumping by the largest amount in a decade in February.

Looking at this confluence of data and considering that consumers have a very different perspective from builders on real estate, the only clear takeaway is that this particular asset class is in flux. Performance in other asset classes, Federal Reserve action on interest rates, inflation, and other readings in the months to come will give us a stronger idea of how real estate will trend this year.

60/40 Portfolios Might Be in Trouble

That data is also relevant to other asset classes. Consumer confidence overall is in a pronounced decline against the backdrop of a trepidatious consumer spending trend. This could spell even more trouble for stocks in the months ahead in retail performance, technology, and manufacturing. The decrease in commodities might limit that impact as consumer prices adjust, but that doesn’t mean the average investment portfolio won’t still take a hit. 

The relative safe havens of bonds and the US dollar enjoyed a slight boost in February. That makes sense in the context of traditional assumptions about asset class correlation and Modern Portfolio Theory. But these boosts are still not serving as a substantial hedge against losses in other asset classes, and bonds are still down year-to-date after a miserable 2022. 

Cryptocurrency Performance Underlines Ongoing Risks

Cryptocurrency performance increased slightly last month, adding to tremendous gains in January. But this comes after a turbulent 2022. We saw extreme swings in cryptocurrency market size and performance last year, fueled by scandals like the FTX collapse. Performance seemed to stabilize a little by the end of December and things look good right now, but there are two issues worth considering looking ahead.

First, a lot of cryptocurrency volume is comprised of day traders. They aren’t necessarily making money, but are generally more reactive than investors making allocations in a longer-term investment portfolio. This is part of what fuels overall volatility in this asset class. When bad or good news hits, monthly and yearly swings can be much more significant than in traditional asset classes. As such, those who contend that cryptocurrency is an effective hedge in a diversified portfolio may be fooling themselves.

But investors remain curious and willing to give cryptocurrency a shot. That isn’t necessarily a bad thing. If your risk tolerance is relatively high, that might be acceptable. If your risk tolerance is lower, allocations to cryptocurrency might be turning your stomach right now. Speaking with an investment advisor can offer more clarity on the best choices for you individually, but this is generally where things stand.

Second, the specter of major regulatory shifts still haunts the markets. Though previous debates on this subject have centered around which regulatory bodies in the US could or should be responsible for cryptocurrency regulation, the consensus now is that Congress will be taking the lead on policy development. This could spell major trouble in this wild, wild west of active trading, especially since Congress doesn’t have a great track record of drafting effective financial regulations. Given the theatrics of the December FTX congressional hearings, it’s unlikely cryptocurrency will be the exception to the rule. This, in turn, may amplify volatility in the coming months.

The Smartest Guys in the Room Barely Outperform

Hedge funds are inaccessible to all but accredited investors. They lure in money through a value proposition that has always been rooted in their promise of outperforming the market. The flavor of that outperformance, however, can vary based on strategy, size, and individual managers.

For instance, the IQ Hedge Multi-Strategy Tracker ETF demonstrated positive performance in 2022. Institutional assessments of the largest hedge funds, however, showed negative performance. We also saw considerable differences in the performance of different types of hedge fund strategies. Commodity programs seriously delivered last year, while multi-strategy and equity funds floundered. Some big-time managers like Ken Griffin at Citadel enjoyed record gains, but overall, the biggest funds struggled, delivering investors their slimmest gains since 2016. The worst performance clocked in at -56%. 

All of this data exemplifies why hedge funds only work with accredited investors. The level of complexity and risk exposure in these allocations requires a certain level of not only risk capital and tolerance but sophistication. And with more than $110 billion in hedge fund outflows last year, the smart money seems to be moving to safer ground. Whether that’s actually a smart move remains to be seen.

What to Watch Out For in March

We’ve still got plenty of economic reports coming in the weeks ahead. Those numbers should provide some guidance on the overall trajectory of the economy. 

The most important trend to watch will be correlation levels between asset classes. Right now, they appear to be aligned with conventional assumptions. Flight-to-safety options like bonds and cash are outperforming traditional risk-on assets like stocks. Depending on the data that comes out in March, we could see volatility drive us into a significant risk-off period, foreshadowing a sluggish economic trajectory. At this point, it’s a waiting game. 

See additional Financial Poise asset class performance analysis here.

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• Crowdfunding from the Investor’s Perspective
• Cryptocurrency 101
• Making Cash with Cannabis
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©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.