Barron's laid out a path to a stagflationary outcome like we had in the 1970's noting the dynamics of the oil market being the primary factor. The Friday growth revisions and inflation data didn't help to refute the argument.
Bloomberg took up a similar conversation talking about what various investment firms are doing to help with the current equity volatility against a backdrop where plain vanilla 60/40 isn't really working.
There was a bit of a spaghetti thrown against the wall aspect to the different strategies expressed in the Bloomberg article. Bonds often work in times like this but are not for reasons we've gone over ad nauseum. What about gold? It sort of isn't working but I have a different take. Gold already worked. Arguably it priced in some sort of turmoil rising about 70% in the last year.
Are there some equities working? Yes but there are always some equities working no matter how bad it gets. For this event, defense stocks certainly have been working until the last week or so, rolling over a little. They also might have priced in turmoil ahead of time.
There was no mention of managed futures which have been interesting in terms of the dispersion of performances. Over longer periods, performance dispersion seems more like magnitude but in the same direction. The long list of funds I track collectively seem to be doing different things on a daily basis. The differences probably come down to different types of signals used as well as risk weighting of positions. There have been times were managed futures has just been killed during equity market volatility, the first 10% down, but that isn't happening now.
Another Bloomberg article suggested buffer/defined outcome funds instead of bonds to help with equity volatility. Buffer/defined outcome funds certainly are not malfunctioning through this, so that's good. I have no reason to think they would malfunction but the basic ones will not be proxies for equities when you want them to be.
Inverse funds are mostly working. But client personal holding BTAL had a couple of disappointing days in there when the S&P 500 was down (good for BTAL) but software stocks had a bit of a recovery (bad for BTAL) that seemed to puzzle people but happened all the same. Going to heavy in inverse funds becomes counter productive at some weighting as too much of a drag. I'm not sure where that line is but mid single digits is not counter productive.
REITs have been doing well which is a bit of a surprise with rates going up. REITs have tended to disappoint in times of turmoil more often than not and yieldy REITs tend to go down when people can better yields from bonds.
The last (only?) time there really was stagflation, foreign equity markets outperformed the US. This was the case in the 2000's albeit with a different circumstance.
Foreign has had a bad week but a real stagflationary event would last more than a week or two and I would want foreign equity exposure in that instance.
What all of this is about is diversifying your diversifiers. Forty percent in bonds, not working. Meb Faber has tweeted about how close 60/40 stocks/bonds is to 60/40 stocks/gold over long periods. Great but gold this month is not working. On the next event, maybe both will work and the things doing a little better now will do very poorly
There's no way to know when some random diversifier you believe in just will not get it done. It would be nice if gold was working this month but I don't want to put clients in a position where gold has to work just like anyone putting clients into 40% bonds is putting them into a position where bonds have to work and they aren't.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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