Commodities and REITs outperformed in the first half of the year. US small and large caps delivered double-digit performance as well. What will the rest of the trading year bring?
The investor in financial markets must always keep an eye on all markets when building a portfolio. Diversification benefits can be obtained by adding uncorrelated assets to a portfolio.
Perhaps it is no better time to look back at the historical performance of various asset classes than during market turmoil. The drop in the oil price yesterday triggered a risk-off move across various financial assets – but how did they perform in the last decade? Also, what is the year-to-date performance and what to expect next?
Top Performers in the First Half of the Year
Commodities, US REITs (Real Estate Investment Trusts), and Bitcoin were the top three performers in the first six months of the year. Out of the three, the surprise comes from Bitcoin. It lost half of its value in the last few months and yet managed to reach the top three for the first six months. Bitcoin delivered solid gains in the past decade as well, as did US REITs.
At the opposite end of the spectrum, bonds underperformed, led by long-duration Treasuries (TLT). The surprise here is the drop in the price of gold, as the yellow metal lost 7.1% in the first six months of the year despite rising US inflation.
Risks for the Second Half of the Year
Moving forward, the second half of the year looks challenging for risk-on assets. Risk-on refers to an environment in which equities rise, the US dollar declines, and the Japanese yen remains weak as well.
The risk for risk-on is that the Fed will signal the tapering of its asset purchases program on the back of higher inflation expectations. If that is the case, commodities and US REITs are favorites for further performance because alternative investments are bought mainly as a hedge against inflation.
A further drop in the US small and large caps may put pressure on the Fed to delay the tapering announcement. But if inflation and inflation expectations keep rising, the Fed might be cornered with no other alternatives left.
All in all, the second half of the year is more challenging than the first one. As the US economy reopens, the danger of higher inflation might be a game-changer for financial markets.