Nowhere to Run, Nowhere to Hide

Martha and the Vandellas’ hit song from 1965 lamented “Nowhere to run to, baby, nowhere to hide.” In many ways that sentiment sums up the investment climate in 2018 whereby no single asset class has provided a 5% return. The root cause of the malaise is difficult to pin down as global trade seems to be the most popular answer. However, the issue has not just been with trade-sensitive asset classes like stocks.

It would seem more likely that after the better part of a decade when global quantitative easing was occurring – central banks holding interest rates near zero while printing money to buy securities (most often bonds) – reversal of these aggressive monetary policies has had a greater impact. The Federal Reserve has been tightening for over a year with multiple rate increases and lack of quantitative easing. However, November of 2018 is the first month in which combined central bank policies globally could be classified as tightening.

So while on the surface it would appear that trade concerns, mid-term election uncertainty, or high market valuations may be to blame (all of which have caused increased volatility from time to time), the fact that all asset classes have been performing in a subpar fashion may be most attributable to global tightening of monetary conditions.

Above is a chart that shows the annual returns for eight asset classes: U.S. large caps, U.S. small caps, international, emerging markets, U.S. Treasuries, diversified bonds, commodities, and real estate. This is the first year since at least 1972 in which not one of these asset classes has returned at least 5% (green bar in top graph). Even in years of extreme bear market conditions there has been somewhere to hide. For example, in 2008 with stocks down 37% Treasuries returned more than 5% while in 1974 stocks lost 22%, but commodities rallied sharply.

The glass-half-full approach would state that the last time asset class returns looked this underwhelming was 2015 when just one asset class returned 5%. However, it was then followed by two years of more broad participation as 75% of the asset classes rose more than 5% in 2016 and an impressive seven out of eight did so last year in 2017.

Current market conditions have had our Investment Committee cautious on the investment landscape since late summer of 2018, and we remain mildly defensive in portfolio positioning with no near-term plans to adjust allocations further. We were hopeful that seasonal trends might allow for a “Santa Claus” rally following mid-term elections, but perhaps global tightening of monetary conditions is making that difficult. Even though we don’t anticipate altering allocations in the near-term, it does not mean we won’t do so if conditions turn more hostile and present a situation where downside volatility would be more pronounced and longer-lasting. Please see important disclosures below.*

If you have any questions about your investment strategy or the JNBA Investment Committee’s perspective on market conditions, please do not hesitate to reach out to your Advisory Team.

*Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by JNBA Financial Advisors, Inc. (“JNBA”), or any non-investment related content made reference to directly or indirectly in the blog will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement.

Please see important disclosure information at https://jnba.com/disclosure/