2017 Winners Make Peculiar Bedfellows

Russ explores why both risky assets and traditional safe havens have performed well this year, and whether that can continue.

Thus far, 2017 has been notable for solid gains, not intellectual consistency. For various reasons, investors have demonstrated a marked preference to “barbell” their risk. Year-to-date performance suggests a preference for either very risky or very safe assets.

The year’s top performers include emerging market (EM) equities, industrial metals and the tech heavy NASDAQ, all traditional “risk-on” assets. However, defensive assets are also performing surprisingly well. See the chart below. Gold has outperformed most developed equity markets, the Japanese yen has rallied and long-dated (20+ year) Treasuries are up over 10%.

Year-to-date asset performance


Nor is this pattern limited to asset class performance. It is also evident one level down, in the performance of equity sectors and styles. High beta segments of the equity market, such as biotech and semiconductors, have posted 20% or better gains. At the same time, minimum volatility strategies have been competitive and health care and utilities, traditional defensive sectors, are the second and third best performing sectors year-to-date. What explains the paradox of risky assets and safe havens rallying together?

1. Factors in favor

This year has been about growth and momentum, both beneficiaries of the slow but stable economic regime. The unraveling of the “Trump trade” has pushed investors back into those growth names, primarily tech, that can generate organic growth. A slow but steady economy also means low economic and market volatility. This phenomenon has supported momentum. In other words, the combination of slow growth and low volatility has favored segments of the market associated with a preference for risk, when in fact what investors really want are companies that can thrive in a slow growth world.