Are You Playing It Safe or Playing with Fire?

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By George Guerin

When equity investors chase what’s hot, it often ends in tears. Today, the safety trades that have been so popular earlier this year are actually looking quite dangerous.

We’ve seen this film before. There are countless examples throughout modern market history of investors following crowds into performance fads and getting crushed on the way down. From the Japanese stock market crisis in 1992 to the technology bubble in 2000 to the US housing crash in 2007, market manias are often seductive.

These days, investors in global stocks are eager to combat volatility and protect against downturns. The quest for a smoother ride has led many to increase allocations to passive portfolios exposed to certain risk characteristics—or factors—which are seen as relatively safe. Less volatile stocks, as characterized by their lower beta, and stocks that offer higher-dividend yield have been especially popular.

Recent trends may be signaling that a reversal is imminent. For example, low-beta stocks outperformed the market in the first half of 2016, but underperformed in the third quarter (Display). Similarly, returns from the highest group of dividend-payers were especially strong in the first quarter but have lost steam since then.

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