Economic anxiety is taking a toll on risky assets so far in August. The mid-month summary for the major asset classes boils down to: bonds are up, stocks, REITs and commodities are down. High-yield fixed income has lost ground on a price basis as well this month through August 16, based on representative ETFs listed in the table below.
The net result is that the Global Market Index (GMI) has retreated by 0.8% month to date in August. GMI, the proprietary benchmark for The Beta Investment Report, is designed as a market-value weighted index of all the major asset classes. Over the long haul, this passive index of everything has done fairly well. That’s no surprise, for reasons I discuss in my book Dynamic Asset Allocation. For the 10 years through the end of last month, for instance, GMI has returned an annualized 4% vs. a slight loss for U.S. stocks (Russell 3000). (For additional perspective, see our latest monthly update of the major asset classes here.)
But in the short term, anything’s possible. This month, a broadly diversified portfolio is suffering, or so GMI’s modest decline suggests. More of the same is probably coming until the crowd receives a higher degree of clarity on the broad economic trend generally and one question in particular: Is a double-dip recession looming, or will the economy muddle through with subpar growth?
We’re still in the latter camp, as we have been all year. But that’s not written in stone, depending on the economic reports in the coming weeks. Indeed, it feels like we’re near closure, for good or ill, on the issue of what’s happening with the business cycle.
Back in January of this year, we were skeptical that the news of a surge in 2009’s Q4 GDP wouldn’t last. As we opined that month, there were still too many weights on the economy that threatened to keep growth low. That view still holds. If anything, the outlook has deteriorated.
Our optimism, if you will, is that we haven’t thrown in the towel yet on the question of subpar growth vs. outright GDP contraction. Much depends on how the next month or two plays out. That includes how the labor market fares through the autumn. Another key variable is the Federal Reserve. At the moment, we’re less than enthused with the central bank’s reaction to recent economic news, as we explained here and here, for instance. The Fed may not be able to keep growth positive at this late hour. But if it doesn’t try harder with more quantitative easing, the odds of a new tumble in GDP look considerably higher.
Even if you expect the economy to remain in a modest growth mode, as many economists predict, the outlook will still be rocky for the economy and for investing. For the moment, the age of diminished expectations is upon us.