It will take more than Friday’s big bounce to put to rest the fear of a bear market in stocks as uncertainty about the Federal Reserve’s ability to get a grip on inflation without sinking the economy stokes fears of stagflation — a pernicious combination of slow economic growth and persistent inflation.
Stagflation is “an awful environment” for investors, usually resulting in stocks and bonds losing value simultaneously and playing havoc with traditional portfolios divided 60% to stocks and 40% to bonds, said Nancy Davis, founder of Quadratic Capital Management.
That’s already been the case in 2022. Bond markets have lost ground as Treasury yields, which move opposite to prices, soared in reaction to inflation running at the highest in more than forty years along with expectations for aggressive monetary tightening by the Fed. Since the S&P 500 index’s record close on Jan. 3 this year stocks have been on a slide that’s left the large-capitalization benchmark on the verge of formally entering bear market territory.
The iShares Core U.S. Aggregate Bond ETF
is down more than 10% year to date through Friday. It tracks the Bloomberg U.S. Aggregate Bond Index, which includes Treasurys, corporate bonds, munis, mortgage-backed securities and asset-backed securities. The S&P 500
is down 15.6% over the same stretch.
The situation leaves “practically nowhere to hide,” wrote analysts at Montreal-based PGM Global, in a note this past week.
“Not only are long-term Treasuries and Investment Grade credit moving nearly one-for-one, but selloffs in long-term Treasuries are also coinciding more frequently with down days in the S&P 500,” they said.
Investors looking for solace were disappointed on Wednesday. The eagerly awaited U.S. April consumer price index showed the annual pace of inflation slowed to 8.3% from a more than four decade high of 8.5% in March, but…
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