Friday’s sharp rally in stocks still kept major U.S. stock benchmarks close to entering a bear market, as worries about the Fed’s ability to rein in inflation without affecting the economy fueled fears of stagflation — a detrimental combination of slowing growth and economic growth. persistent inflation.
It’s not just about stocks.
Nancy Davis, founder of Quadratic Capital Management, said stagflation is a “bad environment” for investors, often causing stocks and bonds to depreciate at the same time and wreaking havoc on traditional investment portfolios, which make up 60% of stocks , bonds accounted for 40%.
This is already the case in 2022. The bond market has lost ground as Treasury yields, which move in the opposite direction of prices, soared in response to inflation hitting its highest level in more than 40 years and expectations of aggressive monetary tightening by the Federal Reserve. Stocks have been sliding since the S&P 500’s record close on Jan. 3, putting the large-cap benchmark on the verge of officially entering bear market territory.
iShares Core US Aggregate Bond ETF AGG,
It was down more than 10% so far this year as of Friday. It tracks the Bloomberg U.S. Aggregate Bond Index, which includes Treasuries, corporate bonds, municipal bonds, mortgage-backed securities and asset-backed securities. S&P 500 Index,
It fell 15.6% over the same period.
The situation has “almost nowhere to hide,” analysts at Montreal-based PGM Global wrote in a report last week.
“Not only are long-term Treasuries and investment-grade credit moving almost one-to-one, but long-term Treasuries sell-offs have more frequently coincided with days when the S&P 500 is falling,” they said.
Investors seeking comfort were disappointed Wednesday. The much-anticipated U.S. consumer price index for April showed annual inflation slowing to 8.3 percent from a more than 40-year high of 8.5 percent in March, but economists have been looking for a more pronounced slowdown, with core data stripping out volatility that was more volatile. Big food and energy prices showed an unexpected monthly rise.
This highlights concerns about stagflation.
Federal Reserve Chairman Jerome Powell warned in a radio interview on Thursday that policymakers’ ability to fight inflation while avoiding a “hard landing” for the economy is uncertain.
“So the question of whether we can achieve a soft landing may actually depend on factors beyond our control,” Powell said.
Davis is also the portfolio manager of IVOL, a secondary interest rate volatility and inflation hedge exchange-traded fund,
Has about $1.65 billion in assets and aims to hedge against rising fixed income volatility. The fund holds inflation-protected securities and is exposed to the difference between short- and long-term interest rates, she said.
She said in a phone interview that the current interest rate market is “very complacent”, suggesting that a Fed rate hike “will create a deflationary environment” and that tightening is unlikely to address the supply-side problems that have plagued the post-coronavirus pandemic. on the economy.
Meanwhile, analysts and traders are debating whether Friday’s rally in stocks heralded the beginning of a bottoming process or simply a rebound from oversold conditions. Doubts about the bottom are running high.
“Inflationary pressures have just eased after a week of heavy selling, and the Fed appears to be holding on to the next two 50bps hikes [rate-setting] Quincy Krosby, chief equity strategist at LPL Financial, said:
“Friday’s rally managed to cut this week’s losses by nearly half, but despite the massive upside, overall volume is subpar and more is needed to think even a small low is close at hand,” Technical Strategy chief Mark Newton said. fund.
That’s a pretty big rebound. Nasdaq Composite Index,
After slipping into a bear market earlier this year and falling to a near 2.5-year low over the past week, it rose 3.8% on Friday, its biggest one-day percentage gain since Nov. 4, 2020. That reduced its weekly decline to still as much as 2.8%.
The S&P 500 rose 2.4%, nearly halving its weekly loss. That sent the U.S. large-cap index down 16.1% from its record close in early January, before closing Thursday just below the 20% correction that meets the technical definition of a bear market. Dow Jones Industrial Average DJIA,
It rose 466.36 or 1.7% and was down 2.1% on the week.
All three major stock indexes are in a prolonged losing streak, with the S&P 500 and Nasdaq falling for six straight weeks, their longest losing streak since 2011 and 2012, respectively, Dow Jones market data showed. The Dow fell for the seventh straight week — its longest losing streak since 2001.
The S&P 500 has yet to officially enter a bear market, but analysts see no shortage of bear market behavior.
As Jeff deGraaf, founder of Renaissance Macro Research, observed Wednesday, correlations between stocks run between the 90th and 100th decile, meaning synchronized performance suggests stocks are largely trading in unison — “This is one of the defining characteristics of a bear market.”
While the S&P 500 has come “disturbingly close” to a bear market, it’s important to remember that sharp stock market corrections are normal and occur frequently, analysts said. According to Barron’s, the stock market has seen 10 bear market corrections since 1950, as well as many other corrections and other major corrections.
But Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, was in a phone interview.
He noted that the rally has seen “every sector of the market up.” “This is not a normal market” and now the worm has turned as monetary and fiscal policy tightens in response to high inflation.
The appropriate response, he said, is to follow the tried-and-true but “boring” advice usually offered in volatile markets: stay diversified, hold multiple asset classes, and don’t panic or make massive portfolio adjustments.
“It’s not fun right now,” he said, but “that’s how the real market works.”