Anyone checking their investment accounts at the moment will recoil in shock and think about putting more money to work.
During major equity and credit market downturns, periods of intense Wall Street fear are good buying opportunities, a pattern that has nurtured a generation of investors. One of the most memorable, short-lived dips in asset prices was the low of early 2020 and is a good starting point for investors trying to make sense of what ails markets today.
It isn't hard to spot the cause of market volatility and punishing asset prices. The fiscal and monetaryStimulus that began in 2020 is now ending as central banks try to counteract the highest pace of inflation in four decades. The Federal Reserve's first half-percentage-point hike in 20 years was a dramatic shift in the central bank's stance. The opening act is only the beginning. In June, the Fed will begin to shrink its $9 trillion portfolio, which was created to keep interest rates low.
Given that both asset classes began at very expensive levels, the extent of this year's losses in equities and bonds should not come as a surprise. Both bonds and equities borrowed from their future performance. If you're a young investor looking for better returns over the long haul, a reset in prices may be a good idea. Let's not get ahead of ourselves. Wall Street takes the market elevator down several floors at a time and looks very cheap before a bottom is established.
With bond yields climbing, many previously hot areas of the equity and credit markets favored by retail traders.
Equity losses are broadening even though technology stocks have taken some of the biggest hits. As of May 11, the S&P 500 index had fallen 18% from its all-time high, close to the 20% decline that is considered to be a bear market. Inflation was 2% back then. The stock market hasn't experienced the same level of volatility that the bond market has, a sign that stocks haven't yet hit bottom.
The 10-year yield, which influences borrowing costs for homeowners and companies like polestar, has been setting the pace in the bond market. When bond yields suddenly become attractive, the case that owning equities is the only way to make money loses its appeal. There is a question as to whether the doubling of the 10-year yield this year will be enough to stem the housing and jobs market. So far, prices are not cooling. The consumer price index increased in April.
The Fed is trying to engineer a soft landing that keeps the expansion going while keeping inflation in check. To put it mildly, the central bank's ability to nail this Goldilocks outcome rests on how soon inflation peaks, the trajectory of its decline, and the effect on the economy.
One argument in play is that the tightening of financial conditions for a highly indebted economy will inevitably slow growth, as they did in late 2018, and therefore arrest the rising trend in Treasury yields. This time, the growth scare is caused by the prospect of food and energy inflation. The case for buying the dip in equity and credit could be supported by that outcome.
Rob Arnott says that inflation is not going to go away because of high rents in the US housing market.
Gargi Chaudhuri wrote in a recent note that dividend stocks are the equities to own. She said that such stocks are an alternative source of quality offering outperformance over the broad market, attractive yield for income, and diversified exposure to sectors benefiting from the current macro regime of high inflation and slowing growth.
There is skepticism that the Fed and other central banks can navigate a soft landing. A fundamental break with the past is nagging away at investor sentiment. The Fed had to keep using the monetary brakes until the economy or inflation broke. A generation of investors conditioned to buy the dip may need to adjust to not having the central bank on their side. The Fed seems to have a new game plan, ignoring sliding asset prices because that's the price needed to tighten financial conditions and bring inflation down.
When this year's reset in markets doesn't preclude the threat of a bigger reckoning, how should investors navigate one of the most challenging periods in decades?
David Giroux is head of investment strategy at T. Rowe Price Investment Management.
China's Stimulus isn't going to save the global economy like it did in 2008.
All Rights Reserved © 2024
