In the conventional investment perspective, risk-on assets (i.e. investments with higher risks and higher potential returns) such as stocks are on a see-saw with risk-off assets (investments with lower returns and lower risk, such as Treasury bonds). When risk appetites are high, institutional managers and speculators move money into stocks and high-yield junk bonds, and move money out of safe-haven assets such as gold and U.S. Treasuries.
But recently, markets are no longer following this convention. Safe haven assets such as precious metals and Treasuries are soaring at the same time that stock markets bounced strongly off the post-Brexit lows.
Risk-on assets (stocks) rising at the same time as safe-haven assets is akin to dogs marrying cats and living happily ever after.
What the heck is going on?
Why is the market acting so schizophrenic? What’s changed?
Before we cover the dynamics that are in play, let’s review the market gyrations so far in 2016.
The Market Gyrations Of 2016
Risk-off / safe havens
Risk-on
In broad brush, the tide that raised all risk-on boats for the past seven years is now ebbing.
The momentum that drove the stock market higher since early 2009 has weakened. Stocks have repeatedly plummeted sharply over the past year, only to be saved by central bank jawboning of the now-shopworn “whatever it takes” variety, or by coordinated central bank purchases of stocks, futures, ETFs, etc.
The momentum has clearly shifted to the risk-off safe-haven assets such as precious metals and sovereign bonds. This flood-tide of cash into bonds has helped push yields into negative territory, an unprecedented development: owners of capital are so concerned about getting their money back that they are accepting negative returns, i.e. guaranteed losses, to park their cash.
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