“Defensive assets are delivering their weakest performance and therefore worst hedge protection of any equity sell-off in at least a decade,” Normand said. “The wall of cash some hypothesize will inevitably flow into equity, credit and EM may remain very high indefinitely.”
The S&P 500 index has fallen about 8% since hitting a record on Sept. 2 amid concerns about valuations, a resurgence of the coronavirus and as the US election comes into focus. But even as stocks dropped, the likes of Treasuries, yen versus the dollar, Swiss franc versus the euro and gold have either done very little or even fallen.
A portfolio of hedges like the yen versus all currencies, the dollar against emerging-market currencies and gold versus the greenback is still worth holding, JPMorgan said, as these have delivered gains in 60% to 80% of major stock-market downturns.
However, the firm sees the equity correction as largely over.
“Another two months will probably be required to resolve uncertainties around the degree of growth downshift and the direction of US policy, but that timeline doesn’t imply that October and November must bring significant, further market declines,” Normand said. “Markets might be three-quarters through their correction, assuming that global growth isn’t en route to sub-trend performance in the fourth quarter.”
