October’s market rout leaves investors with no place to hide
Dual breakdown in stock, bond prices has upended investors’ traditional safety tool kit
A brutal October selloff across stocks and bonds has tested investors’ resolve in a way not seen since the financial crisis.
Stocks around the world have lost more than $5 trillion in value in October, according to S&P
Dow Jones Indices, putting shares in the U.S., Europe and Asia on pace for one of their worst months in years. Adding to the stock market’s anxieties has been a rare simultaneous drop in bond prices that has pushed yields near their highest levels in years.
The dual breakdown in stock and bond prices has upended investors’ traditional safety tool kit of buying Treasurys during periods of volatility, leaving many with losses.
Traditional investment portfolios of 60% equities and 40% bonds have fallen 3.5% in October and are down 1.5% this year, on pace for a rare annual loss that has only been seen during volatile periods in 1990, 2001 and 2002, said Luca Paolini, chief strategist at Pictet Asset Management, which manages $191 billion. Even investors who are heavier on fixed income would still be in the red, with allocations of 75% bonds and 25% equities falling more than 2% this month to drag their performance down 1.3% for the year.
“There’s no real place where investors can hide,” Mr. Paolini said. “This is one of the worst years in a long time for diversification.”
A laundry list of problems sent stocks reeling in October, erasing the hefty gains major indexes notched over the summer. Concerns that the U.S. economy is on the verge of overheating sent bond yields up, inducing the stock market’s first bout of volatility earlier this month as investors were forced to re-evaluate the rich valuations in some
pockets of the market.
Then signs of slowing corporate growth among highflying companies like Amazon.com Inc. and Google parent Alphabet Inc., along with ongoing trade tensions between the U.S. and China, extended losses in stocks and bonds around the world.
The S&P 500 has fallen nearly 8% in October, its worst month in more than eight years. Shares in Europe haven’t fared much better, with the Stoxx Europe 600 declining nearly 6%. Several major indexes in Asia are down in the double digits this month, one of the worst being Japan’s Nikkei, which is on pace for its biggest monthly pullback since 2010.
With losses mounting, the MSCI world equal-weighted index, which gives the stocks of 23 countries the same amount of clout regardless of market value, is down more than 15% from its closing high in late January.
Declines in bond prices, meanwhile, have exacerbated investors’
pain. Annualized losses among U.S. Treasurys and investment-grade bonds are at 9.7% and 4%, respectively, the thirdsteepest declines since 1970, according to a recent Bank of America Merrill Lynch report.
“The market is convinced we’re at the end of the cycle,” said Steve Chiavarone, who runs Federated Investments’ global allocation fund. “Investors think fiscal policy is going to be less accommodative; therefore that’s going to lead to inflation picking up and the [Federal Reserve] is going to be more aggressive.”
The Federated fund, which owns stock and bonds in developed and emerging markets, has fallen 7.7% so far this month. Although that slide knocked Mr. Chiavarone’s fund into negative territory for the year, the fund manager remains bullish on equities and bought depressed shares of growth companies during October’s harsh selloff.
“We would be more concerned if equity volatility was confirmed elsewhere, such as with rising jobless claims or inflation surging,” he added.
Some investors have been unwilling to wade into the volatility to buy depressed assets, whether they be stocks or bonds, several money managers said. Instead, October’s rough patch has pushed some investors to load up on cash.
Cash allocations among Bank of America’s wealth-management clients rose to 10.4% of assets in the most recent week, up from 10% at the end of September. Meanwhile, 174 fund managers overseeing $518 billion are, on average, holding cash balances of 5.1%, well above the 10-year average of 4.5%, according to recent reports from the bank.
Others have shifted toward gold and other assets, such as shares of utility companies and consumer staples that pay rich dividends and tend to hold up better during times of economic distress. Still, the sliver of gains among those assets hasn’t been enough to buoy diversified portfolios.
“We’ve been moving to be a little more defensive,” said Mike Balkin, a William Blair & Co. portfolio manager, who has pared back his fund’s exposure to technology and other growth stocks that had extreme valuations. He has shifted some of that money into shares of consumer and health-care companies. “In a downdraft like this, you’re not going to escape the carnage,” he said.
Even with the losses among bonds, several money managers have moved to increase their exposure to fixed income, willing to bear the declines over the short term for greater stability in their investment portfolio. Of the past seven bear markets, only two caused portfolios split 60/40 between equities and bonds to fall more than 20%,
UBS Group AG said in a recent note.
The Swiss bank’s investment strategists has said to increase exposure to Treasurys and maintains a positive outlook on stocks. Mark Haefele, chief investment officer of the bank’s global-wealth arm, said in a recent note to investors that global growth will slow in 2019 as the Federal Reserve and other central banks unwind their balance sheets and the benefit of last year’s corporate tax cut fades. Wells Fargo Investment Institute has been also recommending investors stay diversified and continue to carry bonds despite short-term pain.
“This isn’t going to end tomorrow. If an investor can stomach another 5% to 10% drawdown, hang tight,” said Liz Young, a senior investment strategist at BNY Mellon Investment Management, which oversees $1.8 trillion.
“If someone’s skittish and can’t handle it, rotate into those safe-haven assets where you can try to hide out.”