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Toughest Market in a Generation

The S&P 500 has finally entered a technical bear market, defined as a greater than 20% drop from the peak. But this is not the main reason why most people are taking a big hit in their investment portfolio. If you happen to be one of them, do not be too hard on yourself because what we are currently experiencing is the toughest market in a generation.


ETF performance during crises
Toughest Crisis in a Generation

It is tough because the traditional safe havens that used to act as stabilizers in a portfolio are also going down. Just look at the relative price movements of the various assets during past crises and compare them to the current crisis.


Traditional Safe Havens


Traditional Safe Havens during Crisis
Bond and Gold when Stocks go down

During past crises going back to the Great Financial Crisis in 2008, government bonds and gold have reliably provided a haven when stocks go down. However, in the current crisis, government bonds are going down almost at the same pace as stocks. Of course, the cause of the current crisis is inflation and hence it should be expected that bonds are not doing well. However, the behavior of gold is a bit harder to explain as gold is expected to do well during inflation. It started well during the crisis but lost steam and seems to be going down with stocks recently.


Currency Safe Havens


Currency Safe Havens during crisis
Safe Haven Currencies when Stocks go down

Traditional safe-haven currencies also provided a reliable hedge for a portfolio during past crises. Most appreciated against the local currency or at least maintained value. However, in the current crisis, both the Swiss Franc and Yen depreciated against SGD. Only USD managed to appreciate. This is likely because the US is seen as taking the lead in hiking interest rates to battle inflation. Japan, on the other hand, is seen as the laggard which explains why the Yen is at a historical low.


What Next?


We do not have a crystal ball so we do not know when these traditional safe havens will wake up and start acting as a portfolio hedge. We can only see the rolling 60 days correlation of each asset against the S&P 500 and compare it against the historical average as shown below.


IEF correlation with SPY
IEF correlation with SPY

IEF is moving further and further away from its long-term average correlation of -0.35 with SPY. It just entered positive territory. Historically, the correlation can go as high as 0.4 so clearly, there's still room to go up further but it can easily just as well reverse down.


GLD correlation with SPY
GLD correlation with SPY

GLD is near its long-term correlation of 0.03 with SPY but it seems to be moving higher. Historically, the correlation can be as high as 0.7 so just like IEF, there's still plenty of room to move higher.


USDSGD correlation with SPY
USDSGD correlation with SPY

USDSGD is some ways away from its long-term average correlation of -0.12 but it looks like it is moving down. This could be a good development for USDSGD as a haven.


JPYSGD correlation with SPY
JPYSGD correlation with SPY

JPYSGD is also some ways away from its long-term average correlation of -0.13 and it looks like it is attempting to move down as well but remains to be seen if it can.


CHFSGD correlation with SPY
CHFSGD correlation with SPY

CHFSGD is below its long-term average correlation of -0.07 but it looks like it is trying to move higher. Technically, CHFSGD should be behaving like a haven since the start of the current crisis due to the negative correlation but it hasn't been so clearly there's a limit to what correlation can tell us.

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