“[It’s] rare to see both bonds and equities losing so much at the same time,” SocGen’s Andrew Lapthorne wrote, in a Monday note.
It was an understatement. Multi-asset portfolios aren’t a monolith, but generally speaking, 2022 is shaping up to be one of the worst years in modern history for simple stock-bond strategies. If Lapthorne wanted to resort to hyperbole, no one would blame him.
“In 2021, investors (and the Fed) failed to see that stock and bond prices, sitting on opposite sides of the risk-on/risk-off ledger, were actually driven by the same underlying force: The strong promises of a market-friendly Fed,” Macro Risk Advisors’ Dean Curnutt said, in a recent note. “In the long period of disinflation that ended with the pandemic, low rates boosted stock prices through both earnings and the P/E ratio.”
That’s out the window now. And extremely depressed market sentiment suggests many investors were surprised at the extent to which the rapid increase in real rates bled multiples. As I’ve said time and again, it’s about the rapidity of rate rise more than it is any level for bond yields. Or at least in the near-term. 10-year reals are just barely above zero, but that belies a multi-standard deviation jump over a very compressed time frame.
In any case, the concurrent drawdown in equities and fixed income is a veritable nightmare, with the caveat that we’re talking about markets and money here, not real pain and suffering. Ukraine is a nightmare. Yemen is a nightmare. The 60/40 drawdown is an annoyance.
But it’s an expensive annoyance and it’s unlikely to end with a whisper. The fact that the $12 trillion market cap decline in global equities is playing out alongside a historic rout in US Treasurys and investment grade credit could have “consequences [that] reverberate for some time,” Lapthorne warned.
Note that the combined drop in equity and bond market cap sums to $20 trillion from the highs. And yet, as the figure on the left (above) makes clear, additional losses are required for a return to trend.
“Of course, this drop… must be viewed in the context of the rapid growth in asset values over the last couple of years,” Lapthorne remarked. “One could argue that all markets are doing is removing the excesses as monetary policy is tightened,” he added, noting that “a simple trendline analysis argues for another $20 trillion decline from here.”
Whether that’s something the Fed is prepared to countenance is debatable. There’s widespread agreement that the “Fed put” is, at best, struck so far below spot equities that it hardly bears mentioning until inflation recedes. But turmoil in bond markets is another matter altogether. As Lapthorne put it, “for risk-free assets to be so risky is bound to be problematic.”
“With inflation consistently below target, the Fed had air cover to implement more policy and, critically, to quickly back away from any attempts to normalize lest the market cry that policy had become overly hawkish,” MRA’s Curnutt said. “No mas.”
Lately stocks and UST bonds are moving in opposite directions again. That is comforting to me at least. We shall see.
It is, indeed, a most ugly time. I don’t believe we have seen sufficiently broad capitulation. I don’t think the real money is dramatically hurting yet. And we still have ongoing, outstanding variables that can impose on market health and well-being. I’m worried about Covid lockdowns in China impacting the supply chain, and the ongoing impacts of oil supply interruption due to the war. Biden has done a great job of reconnecting the US with NATO and asserted our common purposes with the allies in support of Ukraine. But I’m not entirely confident about his ability to get his arms and his mind around economic issues. I reckon he sees it as a big mess that he was never able to figure out. I voted for Joe and I like what he wants to do. But I don’t like his execution. He needs a proper economic advisor.
Janet Yellen as Secretary of the Treasury is the only reason to have any confidence and hope imho…
I agree, John. Thank you for the thought.
Interestingly, Yellen was the chair in the council of economic advisors under Bill Clinton. Robert Rubin, who was Treasury Secretary, and Larry Summers later on, were highly visible scapegoats if the economy went south. But the economy did well in the 90s. I wonder to what extent Biden is prompting Yellen to speak up about policy on behalf of the administration.
Yellen’s knowledge and role are resources. She has a very capable and experienced voice in monetary policy. Someone does not know what they’re doing here.
Maybe we need to remember that a pandemic and now war are constraining the labor and commodities supplies.
Inflation and investor pain now are the result of the avoidance of a depression in 2020.
How could the executive branch tackle inflation besides attempting to put breaks in the economy by convincing the legislative branch to tax more and foster competition?
I think Putin and his band of troublemakers will be going flat out to get the Republicans and trump back in charge.
Imagine poor Ukraine if Trump and his band of misfits were in charge now
Horrible scenario…one thing is for sure Ukraine would be receiving minimal military aid if any at all.
Guaranteed a barrage of cyber attacks and other destabilizing activities is facing the US from Putin