January was another rough month for most asset classes. It was tempting to think there were legs to December’s rebound, which ended the non-stop crushing losses of September-November. Eventually, the genuine rebound will come. In the meantime, there are false starts, as January reminds.
The good news is that last month wasn’t a complete sea of red ink. That’s an improvement over September’s and October’s across the board losses in the major asset classes. Nonetheless, the gains keeping us out of total red last month rested thinly on high-yield, emerging-market and inflation-indexed bonds.

Even cash (3-month T-bills) suffered a loss for January, albeit a mere -0.01%, which rounds out to zero on our table above. That’s the second month in a row for losses in cash, following December’s -0.02% retreat. How could T-bills lose money? With short rates falling to virtually zero recently, a slight uptick in T-bill yields was enough to tip returns just under zero on a monthly basis.
It’s now looking like December was one of those infamous dead-cat bounces. The selling going into December had been so deep and so broad as to inspire some across-the-board bargain hunting. The unusually rich yields corporate and muni bonds, for instance, were just too tempting to pass up, even in a severe recession. REITs too attracted value investors in December, a month that witnessed an exceptionally strong surge of buying for the asset class.
But bargain hunting has its limits, at least until there’s more confidence about the economic and political futures.
Investors still don’t have a good sense of how much pain is coming this year, or when the pain will begin to ebb. Keeping everyone on pins and needles is the political bickering over the fiscal stimulus package now being debated in Washington. The Senate is set to start reviewing the $900 billion stimulus plan today. News reports this morning tells us that both Republicans and Democrats in the Senate are intent on changing the legislation. Exactly what that means for the fate of this massive new spending bill remains unclear. Given the precarious state of the economy, any worry that the stimulus plan might be delayed or even killed is keeping investors on edge.
There’s also a fresh round of worry bubbling in the Treasury market. After last week’s FOMC statement failed to lay out specifics on how the Fed would proceed in its reported plans to lower long Treasury rates (which are usually controlled by the market), bond traders went into sell mode. The benchmark 10-year Treasury Note closed last week at 2.844%, the highest in about 2 months.
Overall, there’s no shortage of worries in finance and economics, and the political scene isn’t doing much at the moment to calm nerves. Nevertheless, all the volatility is creating opportunities for those who keep their head and stay focused on return and risk for 3-to-5 years out. As we explain in more detail in the soon-to-be-published February issue of The Beta Investment Report, our broad survey and analysis of prospective return and risk among the major asset classes looks modestly encouraging.
Even so, Mr. Market never gives much, if anything, away for free. The price of alluring future returns these days requires suffering an above-average dose of anxiety in the short term. For those with a deft hand on the levers of risk management and an eye on the future, the anxiety is more than tolerable relative to the expected payoff. That doesn’t make investing easy, of course; if anything, the money game’s getting harder. Working twice as hard for the same return is probably a rough estimate for what awaits.
If you’re up for the challenge, there’s gold in them thar hills. But first, there’s probably another dead cat bounce or two waiting in the wings. There are still quite a few weak hands to shake out of the market’s trees—a necessary condition for laying the groundwork for alluring prospective returns for anyone who stays calm and focused.