U.S. markets are closed today to mark the death of President Ford, but the lack of trading doesn’t dim the optimism that infuses a review of 2006 performance among the major asset classes. As our table below reminds, last year was a very good year.

Very good here is defined by positive performance across the board. As we’ve written previously, it’s rare that all the major asset classes deliver gains within a given calendar year. Or, at least, it used to be rare. Bull markets have become standard operating procedure since 2003, although no one should confuse a trend with a reordering of the laws of money and finance.

No doubt such negative opining will fall on deaf ears in the new year. Throwing money at any or all of the asset classes has been a win-win endeavor, and recent history dominates wetware relative to the lessons of time.
Still, at the risk of being dismissed, we remind that bull markets as far as the eye can see haven’t always been the standard for perception. Asset allocation may have once meant never having to say you’re sorry, but it typically required suffering a setback in some corner of the portfolio.
No longer. For the fourth year running, red ink has been absent for the major asset classes.
For those who think this is the new, natural state of affairs in the capital markets, we salute you for your unbridled optimism. We don’t share your particular strain of optimism, but it’s impressive nonetheless. Indeed, it takes a special mindset to think that bear markets have been banished to the ether. To be sure, bulls within a given asset class are always thinking that the fun can run on longer, only find disappointment eventually. Extending such confidence to multiple asset classes simultaneously elevates hope to unprecedented heights.
Where might disappointment reveal itself in 2007? There are some early hints, based on December’s stumbles. As the table above shows, red ink showed up in five asset classes last month. Yes, in any given month, there are bound to be setbacks, and it’s unclear if the red ink of December offers clues about full-year 2007 performance. But after four straight years of bull markets in everything, the warning signs are increasingly ominous, wherever and however they appear.
Although we’re not inclined to make predictions, we’ll go out on a limb and forecast that 2007 will not deliver a fifth straight year of gains in all the major asset classes. Something will stumble this year; perhaps more than one asset class. It’s simply too much to ask of the financial gods for another 12 months of profits across the investment spectrum.
It is a truism of investment risk that the threat rises as the perception of danger recedes. By that standard, it’s time to question the notion that all’s right with the world. At some point this year, one or more rebalancing opportunities will avail themselves to a degree that’s been absent since 2003. Repricing risk, in other words, will again move to center stage. Taking advantage of that occasion demands holding an overweighted position in cash. Fear, in short, is déclassé, as it always is when its rival emotion is in overdrive.