Investors Run Out of Options As Bitcoin, Stocks, Bonds, Oil Cave To Recession Fears (#GotBitcoin?)
The failure of so many investment strategies is viewed by some as a warning of what could come following years of above-average returns.
Stocks, bonds and commodities from copper to crude oil to burlap are staging a rare simultaneous retreat, putting global markets on track for one of their worst years on record and deepening a sense of unease on Wall Street.
Data show global stocks and bonds could both finish the year in the red for the first time in at least a quarter-century, according to BlackRock Inc.
Major stock benchmarks in the U.S., Europe, China and South Korea have all slid 10% or more from recent highs. Crude oil’s tumble has dragged it well into bear-market territory, emerging-market currencies have broadly fallen against the dollar, and bitcoin’s price—which had a meteoric rally last year—crashed below $5,000 last week for the first time since October 2017.
Havens such as U.S. Treasury bonds and gold rallied this fall as U.S. stocks and industrial commodities staged their fourth-quarter swoon. But both are still down on a price basis for the year, reflecting solid economic growth and tighter Federal Reserve policy that have begun to push interest rates out of their post-financial crisis doldrums.
All told, 90% of the 70 asset classes tracked by Deutsche Bank are posting negative total returns in dollar terms for the year through mid-November. The previous high was in 1920, when 84% of 37 asset classes were negative. Last year, just 1% of asset classes delivered negative returns.
It hasn’t felt like a bad year, but retrospectively, it’s been a pretty miserable year. —Thomas Poullaouec, T. Rowe Price
The broad pullback in markets is leaving fund managers scrambling to find places to park their money. But with global growth showing signs of slowing and monetary policy expected to tighten further, few are eager to place large wagers and risk compounding earlier failures to generate expected gains. Indeed, the simultaneous failure of so many investment strategies is being viewed by some as a warning of what could come following years of above-average returns.
“It’s been a difficult year,” said Ed Keon, chief investment strategist at asset-management firm QMA, which continues to favor stocks over bonds. “All investors have goals, and none of those can be fulfilled with negative returns.”
Few investors believe a recession, particularly in the U.S., is imminent. Yet the strength of the U.S. economy has allowed the Fed to continue stepping further away from the regime of rock-bottom interest rates and bond-buying put in place after the financial crisis. That has, in turn, diminished the premium investors get for taking on risky assets, pressuring a variety of markets.
Hedge-fund manager Pierre Andurand, who earlier in the year bet oil could soon hit $100 a barrel, saw his $1 billion Andurand Commodities Fund suffer its largest monthly loss ever in October. Funds that had built up large stakes in fast-growing technology companies were also stung by sharp reversals. Twenty-six funds dumped their entire stakes in Facebook Inc. in the third quarter, according to a Goldman Sachs Group analysis of 13-F filings, including billionaire Daniel Loeb’s Third Point LLC, which offloaded 4 million shares, citing “a very disappointing quarter” for Facebook.
Some contend the market’s 2018 stumbles aren’t all bad. The declines across stocks, bonds and commodities that had finished last year in the green reflect in part a healthy, albeit painful readjustment of expectations, some investors say.
“A year like this—it shakes out some of the situations that were out of kilter with the rest of the economy,” said Jason Pride, chief investment officer for private clients at Glenmede Trust Co. After markets around the world soared to records last year, buoyed in part by synchronized global economic growth but also by a surge in investor optimism, “we actually needed to take some air out of the system,” Mr. Pride said.
He, like many others, is betting the bull market in U.S. stocks still has longer to run before the economic expansion morphs into a downturn. While U.S. economic data have been bumpier as of late, with the housing and auto sectors in particular showing signs of strain, the overall picture still looks solid, Mr. Pride said.
Still, even those betting on continued—if more modest—gains in stocks say they have had to take on a more cautious approach as the bull market has aged.
Last year, Glenmede began paring its exposure to some of the fast-growing technology stocks that had run up sharply, betting their outperformance would fade.
“The feedback loop felt horrible—absolutely horrible,” Mr. Pride said, recalling presentations he gave where some clients questioned why the firm had pulled out of stocks that had rallied more than 50% in the past year. That decision has seemed easier to justify more recently, with many former big hitters such as Facebook, Apple Inc. and Netflix Inc. tumbling, he said.
Other firms have told clients to stay invested in stocks but take on a more defensive stance.
UBS Group AG’s wealth-management arm is urging its wealthy clients to hold on to bets on the S&P 500, but with some caveats, using instruments like put options—which typically allow the buyer to profit when asset prices fall—to protect against further pullbacks.
“We’re cautiously optimistic,” said Jerry Lucas, a senior strategist at UBS Global Wealth Management’s chief investment office. “It’s worthwhile to be a little more conservative and have some hedges on to reduce your risk.”
Still, the broad selling has made conditions difficult for many investors.
“It hasn’t felt like a bad year, but retrospectively, it’s been a pretty miserable year,” said Thomas Poullaouec, head of multiasset solutions for Asia Pacific at T. Rowe Price in Hong Kong. “2019 isn’t looking to be any better either.”
Speaking of Bitcoin…
Pay Taxes With Bitcoin? Ohio Says Sure
State backs technology that has garnered lots of hype but failed to gain traction as a form of payment.
Ohio appears set to become the first state to accept bitcoin for tax bills, a show of support for a technology that has garnered lots of hype but failed to gain traction as a form of payment.
Beginning this week, Ohio businesses will be able to go to the website OhioCrypto.com and register to pay everything from cigarette sales taxes to employee withholding taxes with bitcoin. Eventually, the initiative will expand to individual filers.
The idea to accept the digital currency for taxes came from state Treasurer Josh Mandel, who has held the office since 2011 and started taking an interest in bitcoin several years ago. Mr. Mandel, 41 years old, views the new program both as a convenience for filers and an opportunity for “planting a flag” for Ohio in the currency’s adoption.
“I do see [bitcoin] as a legitimate form of currency,” Mr. Mandel said, adding that he hopes other states will follow suit.
Bitcoin was intended as a currency that didn’t require government backing or support when it was introduced 10 years ago. Although it has had success as a tradable asset, it hasn’t gained broad acceptance as a form of payment and has been dogged by concerns that it is used to pay for criminal enterprises.
Ohio’s move wouldn’t give bitcoin legal status, but it would be a kind of tacit approval bitcoin has so far lacked. Tax offices accepting bitcoin “does help send a message that bitcoin’s a technology that can be used by anybody—by bad guys but also by the government,” said Jerry Brito, the director of Washington, D.C.-based research firm Coin Center.
Arizona, Georgia and Illinois have considered bitcoin for taxes, but bills addressing the issue have stalled in their state legislatures. Mr. Mandel, who is an elected official, said he can direct his office to accept bitcoin without approval from the legislature or governor.
Ohio filers will technically send their tax payments to an Atlanta-based payments processor called BitPay, which will then convert the bitcoin to dollars for the state treasurer’s office.
It isn’t clear how many businesses will take advantage of the service, though Mr. Mandel said he has heard from companies asking for it.
Other states are starting to see bitcoin and its underlying technology, blockchain, as a way to attract talent and capital. Wyoming Gov. Matt Mead this year signed legislation to loosen the state’s regulatory environment and make it attractive for blockchain-based businesses to register and operate there. New York developed regulations for cryptocurrency businesses called the BitLicense. Delaware two years ago began a program to use blockchain technology within its corporate registry services, though the initiative lost steam after Gov. Jack Markell, who championed it, left office.
Ohio’s Mr. Mandel is confident that won’t happen after his term ends in January. “I’m confident that this cryptocurrency initiative will continue,” he said.