Seth Wenig/AP
- Markets are volatile, with stocks, bonds, and currencies defying historical patterns.
- Investor concerns include trade wars, tariffs, bond market issues, and US debt sustainability.
- Goldman Sachs suggests hedging with gold and positioning for dollar weakness against major currencies.
Markets have turned turbulent in recent months amid a wave of new risks that disrupt long-held relationships among stocks, bonds, and currencies.
"Recent episodes of simultaneous equity, bond, and dollar declines within that period, especially since early April, have led investors to question whether cross-asset correlations have shifted," wrote Vickie Chang, a macro strategist at Goldman Sachs, on Thursday.
Investor sentiment has been shaken by President Donald Trump's trade war and concerns over import tariffs, bond market dysfunction, the Federal Reserve's independence, and US debt sustainability.
One of the most striking developments is the decline of US stocks, bonds, and the dollar all at once in what some are calling the "Sell America" trade.
This is unusual because bonds typically serve as a cushion when stocks drop, while the dollar tends to strengthen in times of market stress. But the US Dollar Index has already dropped about 8% this year.
This is challenging commonly used hedges and typical portfolio strategies, wrote Chang.
Chang pointed out "newer worries" about the structural risks of Federal Reserve independence and fiscal sustainability in the US that are shaking up normal market patterns. If these concerns persist, asset correlations could stay off-kilter.
Investors should consider three moves to hedge the implications of the fallout from the unusual market movements, she wrote:
- Position for dollar weakness: especially against the euro, the Japanese yen, and the Swiss franc, to protect against new risks and against US-specific growth worries.
Consider buying gold: It's likely to protect against newer structural risks, Chang wrote.
Gold is trading around $3,300 an ounce. Goldman Sachs expects the yellow metal to reach $3,700 an ounce by year-end and $4,000 an ounce by mid-2026.
Watch risks from longer-dated bonds: Long-dated bonds might not reduce risk as much as they normally do.
If concerns about the Fed's independence and US debt hit bond prices, these risks would hurt long-dated bonds harder than shorter-dated ones.
Meanwhile, shorter-dated bond yields should protect against equity downside if the market registers clear concerns about economic growth, Chang wrote. She added that the Fed would cut interest rates if the growth outlook weakens materially.