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.

The biggest loser of late has been foreign stocks, as measured in dollar-based returns. Commodities are faring poorly too. In fact, commodities have been taking it on the chin for longer than any other major asset class, as the red ink across the three time periods in our chart reveals. Of course, U.S. stocks and REITs look weak as well based on recent price momentum.
Arguably, there’s opportunity in all the asset classes noted above. For what it’s worth, we’re inclined only to nibble at such opportunities and only on a tactical basis. Admittedly, that sentiment may be more a reflection of our innate caution than a commentary about prospective returns. Nonetheless, there’s still a case to remain defensive, if only because there’s a bit more uncertainty in the air than we’d prefer. Will the Fed lower rates or not? How dependent are capital markets’ near-term future returns tied to the FOMC decisions in coming days and weeks? And the big question–will the economy stumble by more than Mr. Market expects?
We don’t yet have a good sense of what’s coming on those topics. The future’s always unclear, of course, but it looks especially dicey at the moment. The fog will lift, however, and quite soon, we think. It may or may not be encouraging, but a bit more transparency will go a long way in fleshing out our strategic portfolio adjustments.
Keep in mind, too, that valuation will play a large role in our decision making. Price trends are important, but they’re only part of the strategic picture. How, then, does the valuation outlook stack up? Alas, that’s a question we’ll have to leave aside for the moment as it goes beyond the scope (and time) available to this reporter in this post. Indeed, some analysis just takes more time than the give-it-to-me-now world of blogging allows.