From the High

The S&P hit its high for the year May 21^st and then pulled back -3.61% through June 5^th.  Such a small pullback in such a small time frame is no reason to sound the alarm unless it shows signs of morphing into a more pronounced move.  Currently, none of my quantitative screens exhibit more vulnerability to a sustained downside move. 

Still I wanted to look at this move and see what provided a good hedge against this decline.  The short answer – nothing except Gold.

May 21st to June 5th
S&P 500	-3.61%
Bond Index	-1.50%
Developed Intnl Stocks	-7.00%
Emerging Market Stocks	-6.80%
Gold	2.00%
USD Index	-1.60%

What’s interesting here is that stocks and bonds moved down together.  The last time the S&P had a pronounced move down in the summer/fall of 2011, bonds provided a decent hedge and were up close to 5%.  Also of note was that the dollar was positive, all of which indicate deflationary concerns taking precedence.  Gold was also positive, which can fit into the deflationary narrative depending on one’s perspective about how that shiny metal operates.

When gauging the current numbers, I initially thought inflation concerns helped drive these moves; in theory such concerns should cause bonds and the dollar to fall and gold to rise.  Equities are a mixed bag, depending on the type of inflation.  For example, strong recovery causing inflation = good, while too much money without offsetting production = bad.  This would lead to the conclusion that too much money is forcing the dollar, bonds, and stocks down at the same time.  Except…

Inflation isn’t a concern at all, in fact inflation expectations actually fell during the period.  So what happened?  My wild guess is a combination QE tapering and Japanese market volatility, which was not unexpected.  

The point of the post is not to breakdown market moves and assuage cause and effect.  The point is that every market environment is different.  While the current time frame is short and for now insignificant, it does help illustrate that markets change and the past correlations and subsequent hedging strategies may not work in the future.  So the takeaway is:

• Portfolio construction must evolve to meet current conditions
• Investors must look to intermediate market moves to remove the noise
• Investors make sure their portfolio doesn’t stray from their comfort zone
• As always, moderate and contain portfolio risk

Past performance is no guarantee of future results.  Diversification does not guarantee a profit or protect against a loss. International investing involves special risks, including, but not limited to, the possibility of substantial volatility due to currency fluctuation and political uncertainties. The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts, Inc. or Lincoln Investment.