The Age of Nuance: January Asset Class Returns

January was a rough month for risky assets. For the first time since the financial crisis raged in late-2008, the red ink that spilled was broad and deep across the broad asset classes on a calendar-month basis. Bonds generally held their own in January, but stocks, REITs and commodities suffered sizable retreats.

It was an orderly bout of selling, at least compared to what prevailed a year ago. The bigger question is whether the reversal of January is a sign that the great reflation in the capital and commodity markets in 2009 is over. The answer is probably "yes." Does that mean that a new bear market is upon us? No, or at least we don't expect one. But it's time to anticipate something other than strong, sustained rallies in everything. The money game now appears destined for a more complicated era.

If the intense wave of selling in late-2008 and early 2009 was the perfect storm, the past year or so has been the perfect rebound. After selling off deeply, risky assets were priced for a world of economic collapse. By the spring of 2009, it became clear that the world would survive, which triggered a wave of buying to return the price of risk to something closer to normal. That process is probably complete. If so, the future will bring more months like January, where a mix of results prevails.

Of course, we've been anticipating no less. Back on October 1, for instance, we wrote that "correlations among the various subgroups of stocks, bonds, REITs and commodities are destined for a wider divergence. Designing and managing portfolios, as a result, will become more challenging in the years ahead." And so it has, at least for January. The complication, we think, has legs.

Indeed, the economic outlook is now more complicated, which has spilled over into asset pricing. Absolutes, for good and ill, have dominated in the recent past. Goodbye to all that. The age of nuance has only just begun.

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