By Avantika Chilkoti and Pat Minczeski
Bonds, stocks and currencies are moving in tandem more often, as
central-bank surprises and trade uncertainty assert their grip over
markets.
Known by investors as "risk-on, risk-off," the phenomenon
happens when markets essentially split into two broad buckets that
move together: risk-off, or haven assets, which rally when
investors grow skittish; and risk-on, or growth assets, which rally
when risk appetite returns.
A basket of assets that reflect either risk-on or risk-off
sentiment has moved together nearly a quarter of the past 100 days
through June 19, the highest level since mid-2016, according to a
Wall Street Journal analysis.
Two key assets, the S&P 500 and the euro's value against the
U.S. dollar, tend to rise when investors are optimistic. Two
others, the yield on 10-year Treasurys and the dollar's value
against the Japanese yen, tend to fall when investors grow
skittish.
The number of risk-on, risk-off days has stepped up quickly
since the beginning of the year as investors focus on the change in
strategy from the Federal Reserve and the European Central Bank,
the on-and-off trade tensions coming out of Washington, and signals
of whether China will move to stimulate its economy.
"A lot of these things feel very binary," said Andrew Harman,
senior portfolio manager for multiasset solutions at First State
Investments.
Brooks Ritchey, senior managing director and head of portfolio
construction at Franklin Templeton's K2 Advisors, labels it a
"tweets-on, tweets-off" phenomenon when market moves are guided by
what President Trump says about trade and monetary policy on
Twitter.
A case in point: May 6 and 7 were both "risk-off" days, with
stocks falling along with bond yields after President Trump tweeted
the day before that the U.S. would impose fresh tariffs on China.
"The Trade Deal with China continues, but too slowly, as they
attempt to renegotiate. No!" he wrote.
A month later on June 4, the S&P 500 shot up 2% and bonds
yields rose when comments from Fed Chairman Jerome Powell showed
the Fed had ended a debate over whether its next move would be to
raise or lower rates, and was focusing on whether and when to cut
them.
The risk-on, risk-off way of describing markets came into vogue
following the global financial crisis, inspired by traders' lingo
that mimicked a line from the film "The Karate Kid." The master
compares a karate move to waxing a car, "wax on, wax off."
In contrast to a market where investors buy and sell bonds and
stocks based on their individual characteristics, such as the
underlying corporate profitability, the pattern of assets moving
together grew stronger following the introduction of quantitative
easing, the giant central bank bond-buying programs. Investors saw
the future as black or white: Either exceptional policies would
pull the global economy out of a recession, or they would fail and
there would be another leg down in the crisis.
When risk-on, risk-off patterns emerge, Neil Dwane, global
strategist at Allianz Global Investors, says he remains focused on
stock picks, using risk-off periods as a buying opportunity. And he
looks for investments where returns might not be correlated to big
market moves, such as infrastructure financing for clean-energy
projects.
So far, stock picking hasn't been washed away by the big
risk-on, risk-off moves, as happened in the early part of the
decade, when stocks tended to move up and down in a block. One-year
correlation among stocks in the S&P 500, a measure of how much
individual stocks deviate from the index, is around 0.41 compared
with above 0.75 in 2013, according to Morgan Stanley and Bloomberg
data. Zero signifies no correlation and one signifies perfect
correlation.
"Sometimes our business can get quite complex and there can be
some very interesting relationships to investigate and exploit,"
says Gregory Perdon, co-chief investment officer at Arbuthnot
Latham, a private bank, referring to the process of picking one
stock or bond over another. Lately, he says, "our business is just
so basic."
James Athey, senior investment manager at Aberdeen Standard
Investments, sees investors rushing into certain assets as policy
makers respond to the market mood.
He points to gold, for example, which tends to benefit during
times of uncertainty. It was also a big beneficiary of risk-on,
risk-off sentiment earlier this decade. It has rallied in recent
weeks to over $1400 a troy ounce, its highest level in nearly six
years.
Write to Avantika Chilkoti at Avantika.Chilkoti@wsj.com
(END) Dow Jones Newswires
June 24, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.