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Is A Major Shift Coming in Asset Classes? Thumbnail

Is A Major Shift Coming in Asset Classes?

We have monthly Investment Policy Committee Meetings to discuss the changes that take place in the markets. Fundamental and technical factors are on the agenda. We want to focus on what we see on the technical landscape right now…….. that being the potential for Asset Class changes. Returns for 2023 will be determined in large part by asset class allocation.

Money has to go somewhere, it can not be buried in the backyard. We find that typically it rotates from bonds (Bloomberg Global Aggregate Index, down 20.8% this year) to domestic stocks (down 14.4% according to Black Rock), to cash (up .9% this year) and back. Like sector rotations, these are asset class rotations. We look at the relationship between the major asset classes…

  • Domestic Stocks
  • International Stocks
  • Fixed Income
  • Commodities
  • Currency
  • Cash

The place to be this year has been cash and right now. Cash is still king. International equities are gaining strength, particularly Latin America equities. Domestic stocks are holding their own, recent volatility notwithstanding, in the context of a seasonally favorable trend. 

Commodities and the implications for inflation and thus the Fed’s interest rate policy have been closely scrutinized. Energy prices have long exhibited higher levels of volatility, particularly as winter arrives. All sorts of factors play into this, such as the need for heating, holiday travel and of course the politics of OPEC and other energy producers. Natural gas is a good example of this as it recently experienced a 17% drawdown. Plain and simple, energy prices, and thus commodities, are prone to swift and sharp swings.

As 2023 approaches, any changes in asset class relationships will be instrumental in the performance scoreboard. If one can take advantage of these shifts, next year’s performance might look quite different from this year's performance. We expect domestic equities to regain leadership. It’s also possible bonds may give a significant buy signal in reaction to a more dovish Fed.

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