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After a perfect year in 2017 (S&P 500 up every single month), equity markets are struggling.
The S&P 500 just finished down 2 months in a row (February, March) for the first time since early 2016. Meanwhile, the Japanese Yen is rising, leading all major currencies against the Dollar in 2018. Are these facts related? Can investors count on the Yen acting as a safe haven during times of equity market stress? Let’s take a look…
Data Source for all charts/tables herein: Stockcharts.com (Philadelphia Yen Index, S&P 500 Price Returns)
With data on the Japanese Yen going back to 1977 (Philadelphia Yen Index), we find the following:
Why the disparate performance? The Yen’s status as a safe haven has varied considerably over time, becoming more pronounced in recent years (post-2005).
This is a by-product of the Yen’s oscillating correlation with the S&P 500. The Yen has at times moved in the same direction as the S&P 500 and at other times in opposite directions:
So is the Yen a reliable safe haven?
That depends on your definition of “reliable” and whether you consider recent history to be of greater significance than the overall record. Over the full data set going back to 1977, the Yen’s record as a safe haven is only a little better than a coin flip (52% positive during down S&P 500 months). In recent years, though, that record has improved (63% positive since 2006), particularly during the most extreme down periods (79% positive in months with 3% loss or greater since 2006).
The real question, then, is whether something has fundamentally changed in recent years to warrant an expectation of this inverse relationship continuing. Have the reasons posited for the Yen’s safe haven status become more compelling (see Appendix A below)?
They certainly appear to be, with Japan’s net foreign assets increasing significantly +93% from 2005-2016) and the Bank of Japan implementing negative interest rate policy. But will they continue to be? I don’t know, but the Yen’s reliability as a safe haven depends on it.
Appendix A: Reasons Posited for Yen’s Safe Haven Status
Data Source: Ministry of Finance (Japan).
2. Unwinding of the Carry Trade. Japan’s interest rates are among the lowest in the world, with a central bank rate of -0.1%. In the “carry trade,” investors borrow from low-interest rate countries like Japan and invest in higher yielding/return assets abroad. During times of stress, investors are more apt to pay back these loans, converting back to Yen and driving the currency higher.
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.
In 2017, Charlie was named the StockTwits Person of the Year. He is a frequent contributor to Yahoo Finance and has been interviewed on CNBC, Bloomberg, and Fox Business.
You can follow Charlie on twitter here.
Pension Partners, LLC is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information about Pension Partners please visit: https://adviserinfo.sec.gov/ and search for our firm name.
The information herein was obtained from various sources. Pension Partners does not guarantee the accuracy or completeness of such information provided by third parties. The information given is as of the date indicated and believed to be reliable. Pension Partners assumes no obligation to update this information, or to advise on further developments relating to it.
Past performance is not indicative nor a guarantee of future results.
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