Perspective may be the only true value left when fear runs amuck.
There’s a blizzard of reports swirling about and it’s easy to get confused. One need only review the headlines for a few minutes to feel dizzy. But while the red ink flows like rivers in a hurricane, the first step in assessing what’s happening is stepping back and looking at the big picture. With that in mind, here’s a whirlwind tour of where we stand as of last night:
First, demand for safety has surged–to extraordinary levels. One need only look at the collapsed yield on 3-month Treasury bills for evidence. It’s a rare event when money managers willingly accept a guarantee of no return, perhaps even a slight loss in exchange for assurance that principal will be returned. Welcome to the new age.
The annualized yield on the popular benchmark of a “risk-free” asset closed at 0.03% last night, a sea change from just three days earlier, when the security closed at a 1.49% yield. Reportedly, some investors yesterday at one point were gladly buying 3-month T-bills at negative nominal yields! The rush to safety was so strong that the hope of turning a profit could wait for another day (or year?). The same motivation drove up the price of gold by one of the biggest single-day gains ever for the precious metal. The rise had nothing to do with inflation worries, which are effectively dead for the moment. Rather, it’s all about finding a port that’s sure to weather the financial storm blowing through global markets. A few thousand years of encouraging history in the metal’s ability to preserve wealth aren’t easily ignored these days.
Where does that leave the major asset classes? Battered and bruised, to be sure. With the exception of commodities and bonds–short-term investment grade bonds–there was red ink everywhere yesterday. There’s no shortage of minus signs so far this month either. All the major asset classes are down in September through last night, with the exception of U.S. investment grade bonds as per the Lehman Aggregate Bond Index. As a result, our CS Global Market Portfolio Index (GMP) has slumped 8.5% so far this month, based on our preliminary estimates. That’s better than the S&P 500’s 9.9% drop this month through yesterday, although it’s cold comfort given what’s going on in the world. (We’ll analyze GMP and the implications for portfolio strategy in more detail in the coming days and weeks. As a preview, this isn’t entirely unexpected although it’s clearly painful.)
The biggest fear is now fear itself. Perhaps that’s rational, perhaps not. Lending has dried up, cash is king and everyone’s wondering where the next shoe will drop. That’s hardly a surprise, but strategic-minded investors must keep the big picture in perspective.