It’s probably too soon to decide if the market tsunami has past or is just taking a breather. But it’s not too soon to start assessing the damage among the major asset classes.
As always, such surveys are a mix of looking at the past but with the hope of finding clues about what’s coming. Indeed, future returns are minted from events in the present. Of course, recognizing that is only the first step in a long strategy journey, which is why we keep turning over rocks wherever we find them. Most of the time the effort’s for naught. But if there’s ever a chance to mine intelligence about prospective returns, the opportunity may be highest directly following periods of extreme stress in the capital markets.
That’s just another way of saying that in the rare cases when prices and valuations move to excess, the actions modestly elevate the clarity about future returns and risks. Or so history suggests.
With that in mind, how have the major asset classes fared in recent weeks? As our table below suggests, the answer can be summarized by the central principle of the capital asset pricing model: risk matters. Higher risk has been a costly attribute in recent weeks. Cash, a realm where risk is minimal, was the best performer in the past four weeks. In contrast, asset classes with higher risks have lived up to their profile by dispensing higher losses.
High returns are the other facet at times of high risk, as the past five years remind. But the tables have turned this summer, although that’s hardly an extraordinary or unexpected change for anyone who understands the CAPM-inspired notions of risk and reward.