May’s shaping up to be a rough month for most of the major asset classes. The primary catalyst: debt worries. As investors become increasingly anxious over the ramifications of mounting deficit spending in Europe and throughout the developed world, risk aversion is the new new thing…again.
The riskier corners of the global asset markets are taking it on the chin so far this month through May 14, as our table below shows. Stocks the world over are down by roughly 4% to 8% this month as of last Friday. Equities in mature markets outside the U.S. have been hit hardest. The MSCI EAFE index has shed more than 8% in the first two weeks of May.
The markets are becoming ever more sensitive to red ink, and the message is starting to reverberate in political circles. “This week has started with the news that the German government will press other eurozone countries to follow its example in setting rules for balancing budgets within its regions,” Jane Foley, research director at Forex.com, told AP today. “However, this is unlikely to fundamentally alter sentiment with respect to the euro given broad based skepticism about the ability of Greece to stomach the budget reform already on the table.”
The fact that mounting debts are starting to take a toll on market sentiment should come as no surprise. It’s been obvious for some time that this was a hazard that couldn’t be ignored. “It’s all about debt from here on out, and probably will be for many years,” we wrote last month.
The potential for trouble was compounded given the strong rallies in almost everything in the first quarter and during the 12 months or so through the end of April. It seems that investors were focused on momentum rather than economics. But that’s changing, as it inevitably would, given the magnitude of the fiscal challenge that awaits.
We’ve been advising in The Beta Investment Report for some time now that the stellar rebound in assets since early 2009 was misleading. In the January 2010 issue of the newsletter, for example, we wrote: “Today, it’s easier to argue that the future is bright, or at least brighter. Expected risk premiums are therefore lower. How much lower is the great unknown. But having witnessed across-the-board gains in everything, and at historically high levels as 12-month returns go, we’re inclined to be cautious.”
At the time, relatively few ears were open to such talk. Presumably there are a few more listeners today. Does that mean it’s time to sell everything and go to cash? No, although navigating the world that awaits will be quite a different challenge than what we’ve seen over the past year or so. Big, easy gains in everything is almost certainly history. The new world order of complication is upon us. The details of designing and managing asset allocation looks set to be relevant once more.