What is rotation risk?
Simply put, rotation risk is the chance that investments in one asset class or category within an asset class that were previously in favor, experiencing strong returns and price appreciation (gains), will become less favored and experience price depreciation (losses). This can happen rather quickly, leaving investors with an asset that lost much of the gains enjoyed when that asset was prized. Worse yet, rotations can create sizeable losses to those that bought the appreciating asset towards the end of its run-up in price.
“When America sneezes, the World catches a cold”
This widely used saying dates back to Austrian politician Klemens von Metternich (1773 – 1859) who, at the time of Napoleon, penned the phrase “When Paris sneezes, Europe catches a cold.” Economists and politicians have amended Metternich’s words to reflect America’s dominant role in global economics since the start of the twentieth century. Today, this phrase may be particularly apposite.