Safe Havens Abandoned as Risk Appetite Returns


In a sharp reversal from late 2018, safe havens are crumbling across the board.

Utilities and consumer staples are the only two major sectors with negative returns in the last month. Other areas with less exposure to economic sentiment, like real-estate investment trusts and health care, have also lagged the S&P 500. See the RadarScreen® below.

Meanwhile, industries most sensitive to business conditions have outperformed since Christmas. Energy and consumer discretionaries led first, followed by industrials, transports and now financials.

RadarScreen® showing sector performance over the last month, as of Thursday’s close.

The shift in emotion from fear to greed has developed incrementally. While there haven’t been any single cause, we can still find some reasons for the change in sentiment. First is a simple exhaustion of selling following the worst quarter in a decade. CNBC, for instance, reported on January 14 that cash on the sidelines was at an eight-year high. Three days later, Morningstar said December had record outflows from actively managed mutual funds.

The Federal Reserve has been another big positive by rapidly pivoting from aggressive rate hikes to a wait-and-see approach. Finally, the onset of earnings season is drawing attention back to company fundamentals and away from fear.

Aside from the price action in stocks, other key assets also show a return of “risk appetite.” Crude oil (@CL) is up 16 percent so far in January, putting it on pace for the best month since at least 2001.

The Japanese yen (@JY) has dropped in nine of the last 11 sessions. Traditionally viewed as a safe haven, this currency tends to move in the opposite direction as the S&P 500.

Treasury bonds (@US) have moved almost in lockstep with the yen. It’s pretty interesting to think about bond prices falling and yields rising — despite the Fed signaling fewer interest-rate hikes!

Gold (@GC) initially tried to rally on the dovish monetary policy. But now even that safe haven has stalled as investors opt for risk-on assets like emerging-market equities and copper (@HG).

Cboe Volatility Index (VIX), monthly bars, showing monthly change in points.

Finally, volatility has steadily dropped. Cboe’s VIX Volatility Index has shed almost 8 points since the end of December, putting it on pace for the biggest monthly decline since October 2015.

In conclusion, investors still face the risk of trade uncertainty with China and the ongoing government shutdown. But with the economic data not yet signaling a recession, they’re focusing on the positives right now.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.