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The stock market has seen its biggest monthly drop in six months in September, as investors have grown increasingly queasy over the economic outlook. But safe-haven assets, which normally benefit from this kind of risk aversion, have seen their worst performance in a decade, according to JPMorgan.
The S&P 500 index has lost over 4% so far in September, led predominantly by declines in the energy, technology, and financial sectors, all of which tend to suffer the most when investors get nervous about the economy.
The most recent raft of data has painted a picture of a US economy that is recovering, albeit at a slower pace, from the worst of the coronavirus pandemic. But a deadlock in Washington D.C. over a new set of stimulus measures and the uncertainty over the presidential election in six weeks' time have offset a lot of the optimism that had set in over both the economy and earnings.
JPMorgan said in a note that so-called defensive assets are delivering their weakest performance and, therefore, worst hedge protection of any equity sell-off in at least a decade.
Gold has fallen by 5% to its lowest in two months, slipping below $1,900 an ounce, while 10-year Treasury yields and the Japanese yen — which often serves as a safe-haven — have barely budged. The dollar has gained about 2% against emerging market currencies.
"For those looking for hedge protection, this typical basket of defensives is functioning about as well as fire insurance that covers just one bedroom in the house," JPMorgan analysts led by John Normand wrote in a note on Friday.
"The performance of safe assets this September has been the worst in at least a decade during a major equity market drawdown," they said.
September's performance of defensive assets has been mediocre, but at least some instruments, such as the Japanese yen against non-US currencies and the dollar against emerging market currencies, had delivered.
The euro has lost almost 2% against the yen this month, while the pound sterling has fallen by almost 6%, largely as a consequence of concern about the economic impact of a no-deal Brexit. Meanwhile the dollar has gained almost 7% against the Russian rouble, 6% against the Turkish lira, and 3% against the Mexican peso.
"If these second-bests are unappealing, the last option is to reduce overall risk and hold an above-average allocation to cash," JPMorgan said. "Doing so would be another unintended consequence of easy money policies – that investors take less risk in a zero-yield environment because they perceive cyclical assets to be too difficult to hedge."
JPMorgan said it was unlikely that such a conservative approach would become deeply rooted enough to seriously affect trends in risky markets, but "the mindset may explain why the wall of cash some hypothesize will inevitably flow into equity, credit and emerging markets may remain very high indefinitely."
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