When Traditional Balance Fails: Bonds and Stocks Falling Together

Right now cash (and / or cash equivalent securities) is the only place that you might avoid the price declines in both stocks and bonds. We (at High Rock) have championed the rationale for a more tactical investing strategy which allows us to move to a more defensive strategy when we are uncomfortable with owning expensive assets. Cash (and cash equivalents) are defensive assets.

Sometimes, being defensive becomes an enormous advantage. The correlations between stocks and bonds are expected to balance each other out in traditionally balanced portfolios. We have argued for quite sometime that those traditional correlations are not so dependable any more with asset prices being as lofty as they have been.

That is certainly the case at the moment.

Stocks (gold line) are falling, bond yields (white line) are rising (prices falling), and the correlation (green at the bottom) is moving to 1 (which is 100% correlated), which completely defeats the fully invested stock/bond balance. That is a double whammy to the downside of a fully invested (very little cash on hand) portfolio.

The upside of having some cash on hand is the ability to be able to buy these newly discounted assets at better prices.

This is certainly good news for our clients. 

If stock buyers are full up on their recent purchases (which drove that asset class to some record prices), there will not be much ammunition left to to do much buying on the way down (see Paul's blog from yesterday), so those discounts may come fast and furious.

The good news for bond holders is that eventually the exodus from stocks will likely put some buying pressure on higher quality bonds as the money moves to safer assets out of riskier assets, so the correlation move to 1 will start to go back the other way. But, between now and then expect your fully invested, balanced portfolios to give back some of their recent growth.

The good news is that, if you have some $US assets, the $US usually becomes a desired currency for safety, so that may take some of the sting out. If you have some $US assets.

Bitcoin? Well that has not been a good place to hide. See my blog from Nov. 29 http://highrockcapital.ca/scotts-blog/too-much-money-chasing-too-few-assets.

Right now my friends, cash is a great asset to give you some peace of mind. Enjoy!