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In a market constantly gripped by fear of what’s around the corner – whether it’s Iran, coronavirus, or political uncertainty – there’s no shortage of so-called safety trades. In fact, the list is getting so long that it’s probably time for investors to start doing some soul-searching as to how such a large swath of financial instruments can all purportedly serve the same purpose.
As usual, the explanation for this phenomena is wrapped up in the U.S. Treasury market. With the general consensus view right now that interest rates will stay low(er) for long(er), every asset considered to be a safe-haven or defensive trade is, to varying degrees, tied to the bond market. And of course, the bond market is the most old-school safety trade of them all.
At least that’s the assumption. Whether or not it should still be is one of the most important questions in the market right now, but that’s not my focus for this quick assessment. For more on that, see just about everything else we’re talking and writing about at the TD Ameritrade Network on a daily basis. For now, here’s what we’ve learned about where investors are most likely to run when the going gets tough.
Gold – love it or hate it, the precious metal was the first in 2020 to sniff out incoming worries about, well, everything and anything. Gold got its groove on in early December after finding a floor around $1,450. After slipping during the post-Trade Deal reflation trade between September and December, gold was the first haven trade to seriously break to the upside, climbing above its September peak to a new 7-year high by the first week of 2020. On a technical basis, gold registered as overbought on Dec. 26 before reaching a peak 14-day RSI of 85.
The thing about gold, as any gold bug will happily explain, is that it seems to be a catch-all for just about any risk. A strike on Saudi oil fields? Buy gold! Military hit on Iranian commander? Buy gold! Economy slowing down? Uh-oh. Economy heating up – uh-oh still, cause inflation! It’s hard to keep track of the logic for why gold does what it does sometimes, but right now it’s clear that it is the first place investors are running to. But volatility to the upside implies volatility to the downside, and the harder it is to track why something’s up, the more likely it is investors could get a shock in the opposite direction.
Min-Vol stocks – so-called minimum volatility strategies like USMV and SPLV. I put this group above bonds because right now they have the benefit of both equity-like and fixed-income characteristics. They own big important tech companies and stable consumer stocks, but they also have overweight exposure to utilities and real estate investment trusts, which trade like bonds. So when bonds and stocks are rallying together, as they have been this year as the market prices in another Fed cut, these are doing exactly what they promise to, plus more. Moreover, the group was very stable during 4Q19 as yields trended higher and expensive stocks swung lower. USMV crossed into overbought territory pretty quickly this year, on Jan. 13.
Bonds – ah yes, the tried and true. Treasuries have not just been a diversifier and safety trade, they’ve also rewarded capital handsomely. The most important question for bonds now is whether they are still in the very long-term uptrend that’s the hallmark of this cycle, or if the sharp selloff in September marked the bottom for the 10-year yield. It looked that way for almost four months last year, as the 10-year note notched a few brutal selloffs and made marginally lower-lows before picking up steam at the start of 2020. It took bonds until Jan. 27 to hit an RSI above 70 – a whole month after gold. They still haven’t broken last year’s highs.
U.S. Dollar – perhaps the most important concept of the last two years is considering the greenback as a safe haven. This is most evident by going back to the first quarter of 2018, when the dollar emerged from oversold status in January, right as investors were beginning to rethink the 2017 narrative of “synchronized global growth.” Tariff wars were waged, U.S. stocks trampled over peers, and investors found respite in the apparently unstoppable U.S. economy. But the dollar showed very early signs of breakage at the end of last year, topping out shortly after bonds and gold in September. In fact, even as the other big safety trades got legs at the start of 2020, it took the Wuhan coronavirus to put a big enough scare into economic expectations to send the dollar back towards highs. That means that if the incipient economic comeback of Q4 returns, prepare for the dollar to come under fire.
Bitcoin – can’t forget bitcoin. As I wrote last week, stakes for bitcoin right now are high. It has a history of trading both as a risk asset and a haven asset, and has largely been following the trajectory of bonds over the last six months. And why shouldn’t it? The story for buying bitcoin and bonds have a great deal of overlap in their expectations for central bank cuts. But bitcoin also has a bubbly past and history of sharp moves that few would consider to be risk-averse. Watch closely to see if bitcoin resembles risk-on flows or risk-off. The determining factor may very well come this year if the market is overeager in its expectations for central bank action. Bitcoin was one of the last to join the safety party, registering as overbought for the first time since June on Feb. 10.
