Misery loves company, but returns for the major asset classes show no sign of wear this month from the economic worries of late. If anything, the chatter about deflation and the potential for a double-dip recession has emboldened the bulls in July. Save for TIPS, prices are higher across the board, and by more than trivial amounts for most broadly defined asset classes

Indeed, it’s been a strong month for gains through July 19. There’s no assurance that the advances will hold up through the end of the month, when we publish our strategic monthly recap (the last one was published here). In fact, there’s a good case for expecting a tactical retreat, or at least a downshift in the buying. Meantime, the year-to-date tallies look impressive. Perhaps it’s fair to say that the crowd has been willing and able to climb a wall of worry.
Foreign stocks are the big winners so far in July–equity markets in developed market nations in particular. Vanguard Europe Pacific ETF (VEA) closed yesterday with a gain of more than 7% for the month so far, the clear leader among our ETF proxies for the major asset classes. The rest of the world’s stock markets aren’t doing so bad either. In the U.S., equities have climbed nearly 4%, based on Vanguard Total Stock Market ETF (VTI).
Overall, July has been a powerful month for returns, as shown by the 3.9% price gain so far in July for the Global Market Index, a passive mix of all the major asset classes weighted by market value. As returns for this benchmark go, that’s an impressive run over such a short period. The pace won’t last, of course. But for the time being, there’s a strong tailwind blowing all the major betas higher.
The issue is one of deciding whether a) the markets correctly sense a better-than-expected future in the months ahead; or b) the speculators have gone off the deep end in recent weeks. It’s clear why bond prices might run higher. If investors are worried about economic weakness and deflation, rushing into the safe haven of fixed income has obvious appeal. But why the simultaneous surge in demand for risky assets in recent weeks? Is the economic future a good deal brighter than it appears? Or have the optimists run ahead of reality once again?
Perhaps we’ll have the answer when we publish our strategic update of the markets early next month. Stay tuned.