It’s been a noisy couple of weeks in the markets, driven by concerns about slower economic growth, particularly in the US. We’d argue that’s one of the drivers behind the weakness we’ve seen in US equities.
But we think there are a couple of points worth making. First, we have seen an important divergence in performance both within equities and between asset classes.
The chart below shows the performance of US vs European equities. US equities have sold off and are back where they were in October. They’ve largely given back the post-election rally. European equities have sold off a bit in the last couple of weeks but are still above where they were at the end of last year.
Similarly, when we compare global equities to global bonds, we can again see the dispersion in performance. Global equities have rallied and then sold off over the past year – driven by the US – while global bonds have been much steadier.
Why does this matter? When we think about constructing a multi-asset portfolio, we’re looking to benefit from diversification – asset classes that perform differently in different environments. And that’s what we’re currently seeing at the moment.
Things become challenging in periods, like in 2022, when different asset classes are quite highly correlated. In that case, bonds and equities fell together, as interest rates rose.
What does it mean for portfolios? In our latest rebalance, we diversified our exposures further in most portfolios. We reduced our equity exposure, generally by selling US equities. We’ve added to shorter-dated government bonds, in the US and emerging markets, and, in some portfolios, to European equities.
We think that will help to protect portfolios if we continue to see heightened market volatility.
At the same time, we’re wary of making sharp changes to the portfolios.
Market volatility is a fact of investing, and we’ll stay focused on the long-term outlook, rather than getting whipsawed by the currently noisy political environment that we’re facing.
