Risk Management

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‘Safe Haven Investments’ Are a Myth in This Market

Looking for a safe haven in this choppy market?

Good luck.

“Low-volatility” investments still remain highly correlated to the broader market. Government and corporate bond returns are neck-and-neck with inflation rates — that’s better than the goose egg you get from stuffing cash under the mattress, but hardly a way to grow your nest egg. Since 2009, the favorite safe haven asset of gold has only occasionally broken away from the broader direction of the market, and never for long.

What’s a risk-averse investor to do?

Stocks Move in Lockstep

Since the election, correlation — that is, the amount that stocks in different sectors with different fundamentals move the same anyway — has increased to the highest levels since August. And before the election, it was high anyway based on historical norms. This from a post two weeks ago in the Wall Street Journal MarketBeat blog:

“On a scale of -1 to 1, in which 1 represents perfect lockstep trading, the 90-day correlation gauge is at 0.73, [according to analysts at Keefe, Bruyette & Woods], which is well ahead of the 20-year historical average of 0.5. Prior to the election, this figure clocked in at 0.64.”

In other words, forget that old saw about it being a “stock picker’s market,” because the market — or at least the vast majority of it — is moving in tandem.

For a concrete example, check out the PowerShares S&P 500 Low Volatility Portfolio ETF (NYSE:SPLV). This fund is meant to avoid volatility by plowing the lion’s share of its money into low-risk sectors including utilities (currently 31%), consumer staples (27%) and healthcare (11%). Check out the fund’s official overview here, and you’ll see what I mean instantly just by looking at its top holdings, which currently include cleaning products company Clorox (NYSE:CLX), mega-utility Southern Co. (NYSE:SO), cereal company General Mills (NYSE:GIS) and healthcare giant Johnson & Johnson (NYSE:JNJ), to name a few.

You’d think this would be as advertised, with a “low volatility” track record right? Well, not so much. A look at the last 15 months shows little divergence from the broader market despite largely shunning financials, tech stocks and energy plays. The fund is up 18.8% vs. 19.1% for the S&P 500 benchmark in the same period.

In other words, these allegedly low-risk stocks move just as much (or as little) as the rest of the market most of the time. Their fundamentals and their sectors are meaningless.

Gold’s Glitter Doesn’t Last

So what if stocks move in tandem? There’s always that ultimate hedge against the market, that fallback contrarian play of gold to see you through … right?

Not so much.

Because a similar chart — though admittedly a bit more divergent — gets drawn for gold. If you look back to the bear market lows of 2009 and plot returns to present, gold is up about double and the S&P is up about 80% … a nice premium, surely, but hardly an anti-stock investment.

A closer look at the details shows further proof that stocks and gold move together. Because while there are short periods where gold indeed moves in the other direction, both seem to be decidedly plotting the same long-term trajectory.

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

Historically — particularly in times of crisis — gold is much more volatile and much less correlated to the market than the performance we’ve seen in the last three years or so.

Bonds and CDs? Please.

If you can’t do gold and you can’t do stocks, that leaves bonds. But the sad reality is the truly low-risk bonds — which include Treasury securities or investment-grade corporate debt — don’t do anything for you in the way of growth. The 10-year T-Note is at 1.6% or so as of this writing and 10-year AAA corporate debt is in the ballpark of 2%. Best-case scenario is that you break even on Treasuries at this rate and eke out a mere 40 basis points with top-rate corporates.

Not really inspiring.

And if you think that’s bad, check out BankRate.com’s ratings of the “best” one-year CDs on the market — currently around 1.1% annual rates.

In short, your choices are to take a low-risk investment that basically treads water or to settle for investments that are mostly correlated to the market.

There are options that do break free of this, of course, but they are hardly conventional ideas of safe haven investments. We’re talking real estate or emerging markets here.

The mere fact that those two asset classes enter the conversation about safe haven investments tells you how difficult the current environment is right now.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

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