For half a century, Bridgewater has focused on building a deep understanding of global markets and economies to deliver insights for the most sophisticated institutional investors. In this newsletter, my co-CIOs and I will share key themes from this research.
It’s been a whirlwind few weeks since the election, with a palpable sense that change is in the air. As I travel and speak with investors, I feel their anxiety from the uncertainty of what is coming—and in some cases, their fear or excitement. The world ahead will look and feel different. Are you prepared for it?
Trump in 2016 proved a paradigm-shifting president, because many of the most important strategic directions he laid out in his first presidency persisted and became part of the Biden agenda as well. Both parties now believe that winning the strategic competition with China is a top imperative. The “neoliberal” world view that held for decades—that free trade is best at maximizing prosperity; that eventually China will be “more like the West”; and that the composition of what we make in the US doesn’t matter as long as our GDP is rising—no longer holds sway. Protectionism and industrial policy are now the mainstream.
Now, a second Trump presidency is likely to accelerate the shift to this new paradigm in a starker and potentially destabilizing fashion. Protectionism will likely accelerate more sharply. And we will grapple more intensely with the composition of growth in this country, using modern industrial policy to promote self-reliance, ensure we have sufficient manufacturing capabilities, and prepare to win the race on new technologies.
How should you invest in this world? Almost every investor—in the US or outside of it—is positioned the same way. Investors are more concentrated in stocks than ever, especially US stocks. They are—implicitly or explicitly—betting that US stocks will keep winning, as they have for the past few decades. But valuations are much higher than they were when stocks started this bull run. Trump wants the US to win—but will US stocks keep delivering outsized returns, even when the US winning is already embedded in their price?
The biggest insight in investing is that you don’t need to bet on knowing the answer to this question. Instead, you can hold diversifying investments that could better help you if stocks experience a drawdown. That’s why this week I’m sharing with you a piece of research we did on what assets can help diversify equities. I hope you find it useful.
Karen Karniol-Tambour
Co-Chief Investment Officer, Bridgewater Associates
If the Equity Market Is Down, Does Your Portfolio Have to Follow?
The single most painful thing that can happen to most investors is an equity drawdown. Finding investments that can do well when equities don’t perform is “the holy grail” for most investors—we believe there is nothing more important to add to your portfolio.
Unfortunately, when you look at what happens when equities perform poorly, there isn’t one simple answer that will always win. But allocating to each of the key investments that have provided effective diversification in different equity downturns can create a mix that, as a whole, can achieve the holy grail: helping your portfolio when equities disappoint.
Since 1970, there have been 10 instances when world equities fell more than 15%. I would divide these into two archetypes:
- “Growth Risks”: The 2000s-era drawdowns—tech bubble burst, financial crisis, Eurozone crisis, and COVID—were each driven by risks to growth that hurt equity markets. Bonds were a very effective diversifier, because low inflation allowed the Fed to ease. These periods are highlighted in green in the table below.
- “Inflation Risks”: The ’70s/’80s/’90s drawdowns, as well as 2022, were driven by rising inflation that led to Fed tightening. As a result, bonds performed poorly. A basket of commodities was an effective diversifier, capturing the inflationary pressure. These periods are highlighted in red in the table below.
Note that in the table below we show bonds held at high duration or with leverage. That’s because, in order for bonds to match the same level of volatility as stocks (and therefore better offset stock returns), you need to hold roughly $3 of bonds at a 7 year duration (or $1 at a 20 year duration) for every $1 of equities in your portfolio.
While no one asset reliably performed when stocks fell, a mix of assets can provide more consistent diversification. Holding a mix of bonds and commodities is likely to provide diversification across the range of equity downturns we might experience, without paying a premium for that protection.
This research paper is prepared by and is the property of Bridgewater Associates, LP and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, Bridgewater's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. Any such offering will be made pursuant to a definitive offering memorandum. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice. No discussion with respect to specific companies should be considered a recommendation to purchase or sell any particular investment. The companies discussed should not be taken to represent holdings in any Bridgewater strategy. It should not be assumed that any of the companies discussed were or will be profitable, or that recommendations made in the future will be profitable.
The information provided herein is not intended to provide a sufficient basis on which to make an investment decision and investment decisions should not be based on illustrative information that has inherent limitations. Bridgewater makes no representation that any account will or is likely to achieve returns similar to those shown. The price and value of the investments referred to in this research and the income therefrom may fluctuate. Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur. Investments in hedge funds are complex, speculative and carry a high degree of risk, including the risk of a complete loss of an investor’s entire investment. Past performance is not a guide to future performance, future returns are not guaranteed, and a complete loss of original capital may occur. Certain transactions, including those involving leverage, futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Fluctuations in exchange rates could have material adverse effects on the value or price of, or income derived from, certain investments.
Bridgewater research utilizes data and information from public, private, and internal sources, including data from actual Bridgewater trades. Sources include BCA, Bloomberg Finance L.P., Bond Radar, Candeal, CBRE, Inc., CEIC Data Company Ltd., China Bull Research, Clarus Financial Technology, CLS Processing Solutions, Conference Board of Canada, Consensus Economics Inc., DataYes Inc, DTCC Data Repository, Ecoanalitica, Empirical Research Partners, Entis (Axioma Qontigo Simcorp), EPFR Global, Eurasia Group, Evercore ISI, FactSet Research Systems, Fastmarkets Global Limited, The Financial Times Limited, FINRA, GaveKal Research Ltd., Global Financial Data, GlobalSource Partners, Harvard Business Review, Haver Analytics, Inc., Institutional Shareholder Services (ISS), The Investment Funds Institute of Canada, ICE Derived Data (UK), Investment Company Institute, International Institute of Finance, JP Morgan, JSTA Advisors, LSEG Data and Analytics, MarketAxess, Medley Global Advisors (Energy Aspects Corp), Metals Focus Ltd, MSCI, Inc., National Bureau of Economic Research, Neudata, Organisation for Economic Cooperation and Development, Pensions & Investments Research Center, Pitchbook, Rhodium Group, RP Data, Rubinson Research, Rystad Energy, S&P Global Market Intelligence, Scientific Infra/EDHEC, Sentix GmbH, Shanghai Metals Market, Shanghai Wind Information, Smart Insider Ltd., Sustainalytics, Swaps Monitor, Tradeweb, United Nations, US Department of Commerce, Verisk Maplecroft, Visible Alpha, Wells Bay, Wind Financial Information LLC, With Intelligence, Wood Mackenzie Limited, World Bureau of Metal Statistics, World Economic Forum, and YieldBook. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.
This information is not directed at or intended for distribution to or use by any person or entity located in any jurisdiction where such distribution, publication, availability, or use would be contrary to applicable law or regulation, or which would subject Bridgewater to any registration or licensing requirements within such jurisdiction. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without the prior written consent of Bridgewater® Associates, LP.
The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice. Bridgewater may have a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Those responsible for preparing this report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues.