Nowhere to Hide in the Markets with Crushed Stocks, Bonds and Cryptos

  • 2022 has been difficult for investors, with all major asset classes falling in unison.
  • A combination of rising interest rates, high inflation and slowing economic growth weighed on markets.
  • Investors have found little comfort 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 offers a safe haven less than halfway through 2022, and stocks, bonds and the once high-flying cryptocurrency market are all crushed.

This means that diversification – a key principle of a healthy portfolio – has failed to protect investments against a trifecta of risks, including rising interest rates, record inflation and slowing economic growth. .

These three things are a recipe for stagflation, an economic scenario in which inflation is high, economic growth is slowing, and unemployment is steadily rising. That would be bad news for investors, given that the last time America faced stagflation, in the 1970s, it lost a decade when it came to the stock market.

For now, the only element missing from stagflation is rising unemployment, as recent data has pointed to a still tight labor market and a historically low unemployment rate of 3.6%.

Although there has been an uptick in layoffs at various tech companies in recent weeks, there are still two job openings for every unemployed person in the United States. As long as the labor market remains strong, the US economy could avoid a period of economic stagflation.

This would be good news for 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 the same period.

Bonds are generally negatively correlated to stocks and provide investors with protection during periods of stock market decline. But since rising interest rates lead to falling bond prices, it is impossible to avoid the decline in bonds as long as the

Federal Reserve

continues to raise rates.

This is not the first time that stocks and bonds have fallen in unison. In 2018, the S&P 500 and the aggregate bond index posted negative returns as the Fed raised interest rates and reduced its balance sheet. Now the Fed is embarking on a similar tightening cycle, but on a much larger scale.

Meanwhile, cryptocurrency investors have also been unable to escape the carnage, with bitcoin down around 30% year-to-date and more than 50% year-to-date. compared to its record reached in November. What many saw as an inflation hedge, given the limited supply of 21 million bitcoin coins, is turning out to be a risk asset with strong correlation to tech stocks.

The only asset classes that have proven to be winners in 2022 are commodities and cash. Soaring oil prices due to Russia’s war on Ukraine led to supply constraints and soaring gas and oil prices. This has translated into higher profits for energy companies.

And then there is the money. Even despite inflation at 40-year highs, cash has proven to be king so far in 2022, with the Bloomberg Dollar Spot Index up 0.6% in 2022. And retail investors are holding onto plenty of cash. According to data from ICI, retail liquidity in money market funds topped $1.4 trillion last week.

Whether ditching stocks and bonds in favor of a safe-haven asset like cash remains the right move for investors will be seen later this week when Consumer Price Index data comes out. . If inflation shows signs of falling, this could give the Fed more leeway in its timing of rate hikes, which could fuel a resurgence in risky assets.

“The biggest buying opportunities of the year tend to emerge when uncorrelated assets become highly correlated,” Harris Financial Group’s Jamie Cox told Insider. “The dam will break very soon on the trio of macroeconomic events hampering the markets. I had anticipated that the cessation of hostilities in Ukraine would be the front line; however, it now appears that inflation is falling and the need for a rapid increase in rate of fire will take over.”

Garland K. Long