Stocks Surge While Diversification Struggles

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For many investors, the post-election rise in U.S. stock prices hasn’t necessarily translated to a post-election rise in portfolio values. Does diversification still work?

Leading up to the U.S. presidential election, we saw ample evidence making a case for diversification. Exposure to high-quality, interest-rate-sensitive bonds provided a powerful diversification benefit to offset losses in equities — especially during volatility episodes like the January sell-off and the aftermath of the Brexit vote in June. Investors also benefited from a more global diversification strategy as emerging market stocks and bonds performed better than almost any other asset class. Finally, diversified investors saw returns from the near simultaneous rise across all classes, fueled in part by a continuation in accommodative central bank monetary policy.

Leading up to the election, well-diversified portfolios were rewarded
2016 asset class performance pre-U.S. election (01/01/16 – 11/08/16)

As U.S. equities move higher, other asset classes retreat

But since the U.S. election, diversified portfolios have struggled. Over this short period of time, markets have digested the implications of a more pro-economic growth, less onerous regulatory environment that could come from a Donald Trump administration and a Republican controlled House and Senate. After an initial sell-off in the early morning hours after the election, U.S. equity markets have moved higher, hitting all-time highs on what seems like a daily basis. But as I’m sure you’re aware, other asset classes have not responded with similar enthusiasm.

International equity markets have lagged noticeably as a result of a strong U.S. dollar and potential isolationist trade policies from the new administration. Interest rates rapidly rose as bond markets priced in anticipation for stronger economic growth and higher inflation. What’s more, had it not been for OPEC’s announced production cuts at the end of November, which caused oil to spike higher in price, commodities would have also delivered a relatively lackluster performance.

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