- 2022 has been tough for investors, with all major asset classes moving lower in unison.
- A combination of rising interest rates, high inflation, and slowing economic growth have weighed on markets.
- Investors have found little solace in a diversified portfolio given that bonds are down 10% year to date.
It’s been a brutal year for investors.
There is seemingly no corner of the market that’s providing a safe haven less than halfway into 2022, and stocks, bonds, and the once high-flying cryptocurrency market are all getting crushed.
This means that diversification — a key tenet of a healthy portfolio — has failed to protect investments from a trifecta of risks, including rising interest rates, record inflation, and slowing economic growth.
Those three things are a recipe for stagflation, an economic scenario in which inflation is high, economic growth slows, and unemployment steadily increases. That would be dire news for investors, given that the last time America dealt with stagflation, in the 1970s, it lost a decade in regard to the stock market.
For now, the one missing element to stagflation is rising unemployment, as recent data has indicated a continued tight labor market and a historically low unemployment rate of 3.6%.
While there has been an uptick in layoffs from various tech companies in recent weeks, there are still two job openings for every unemployed person in the US. As long as the labor market remains strong, the US economy could avoid a period of economic stagflation.
That would be welcome news for both stock and bond investors. The S&P 500 is down 15% year to date, while the Bloomberg-Barclays US Aggregate Bond Index is down 10% over that same period.
Bonds are usually negatively correlated to stocks and provide protection to investors during periods of decline in the stock market. But because rising interest rates lead to falling bond prices, there’s no avoiding the downturn in bonds as long as the
continues to hike rates.
This isn’t the first time stocks and bonds have fallen in unison. In 2018, both the S&P 500 and Aggregate Bond Index printed negative returns as the Fed hiked interest rates and reduced its balance sheet. Now, the Fed is embarking on a similar tightening cycle, but on a much larger scale.
Meanwhile, investors in cryptocurrencies have also been unable to escape the carnage, with bitcoin down about 30% year to date and off more than 50% from its record high, reached in November. What many considered to be a hedge against inflation, given bitcoin’s limited supply of 21 million coins, is proving to be a risk asset heavily correlated to technology stocks.
The only asset classes that have turned out to be winners in 2022 are commodities and cash. Spiking oil prices due to Russia’s war against Ukraine have led to supply constraints and surging gas and oil prices. That has translated to bigger profits for energy companies.
And then there’s cash. Even despite inflation at 40-year highs, cash has turned out to be king so far in 2022, with the Bloomberg Dollar Spot Index up 0.6% in 2022. And retail investors are holding on to a lot of cash. According to data from ICI, retail cash in money-market funds topped $1.4 trillion last week.
Whether the move away from stocks and bonds and into a safe-haven asset like cash remains the right move for investors will be seen later this week when consumer-price-index data is released. If inflation shows signs of turning lower, it may give the Fed more breathing room in its rate-hike schedule, which could fuel a resurgence in risk assets.
“The greatest buying opportunities of the year tend to appear when noncorrelated assets become highly correlated,” Harris Financial Group’s Jamie Cox told Insider. “The dam will break on the trifecta of macro events hindering markets very soon. My anticipation was cessation of hostilities in Ukraine would be first in line; however, it now appears inflation falling and the need for rapid-fire rate increases will take the line.”
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