Wall Street weeks ahead – investors sheltered from twin declines in US stocks, bonds

As the first quarter of 2022 closes, the S&P 500 is down about 5% year-over-year, having fallen 12.5% ​​earlier in the year. Meanwhile, the ICE BofA Treasury Index was recently down 5.6% this year, marking its worst start in history.

Investors have traditionally relied on a mix of stocks and bonds to blunt declines in their portfolios, with stocks ideally rising amid economic optimism and bonds strengthening in times of uncertainty.

However, this strategy could go awry, and market volatility stemming from Russia’s invasion of Ukraine, rising commodity prices and the Fed’s sharp tilt make it difficult to follow the playbook this time around.

Although a sharp jump in stocks has halved the S&P 500’s losses year-over-year, some investors are wary that the rebound may not last and are looking to cut their risk.

“We’re in a perfect storm right now,” said Katie Nixon, chief investment officer at Northern Trust Wealth Management. “We’ve been in a period of heightened geopolitical risk before, but this seems a little different. The negative consequences could be much more severe and widespread.”

Nixon is increasing stakes in agriculture and energy companies as well as real estate investment trusts (REITs), which have served as inflation hedges in the past.

Data from BoFA Global Research shows investors moved $13.2 billion in cash and $2.1 billion in gold during the past week. There was an outflow of $3.1 billion in US stocks, the biggest in nine weeks. The firm’s latest survey earlier this month showed fund managers’ cash position at the highest level since March 2020.

George Young, a portfolio manager at Villere & Co., is increasing his portfolio’s cash allocation to about 15%, up from the 3% of the assets he normally holds.

“Cash isn’t really paying anything and is arguably negative because of inflation, but we’re not seeing a lot of things that we want to buy,” he said.

Michael Frederick, head of income investing for BlackRock’s Multi-Asset Strategies team, wrote in a note Friday that the recent decline “has been more painful than many prior bouts of volatility” due to twin sell-offs in both stocks and bonds. .

It is more bullish on dividend-paying stocks, which trade at a lower forward-priced earnings valuation than the broader S&P 500, and are less sensitive to rising interest rates than growth stocks or bonds. .

Gaining gains in the bond market has been particularly difficult, as investors recalculate their portfolios to a Fed that is ready to fully engage in its fight against inflation.

Yields on the 10-year benchmark US Treasury, which moves in contrast to bond prices, soared to a three-year high of nearly 2.5% over the past week, with investors now valuing the interest rate this year by more than 200 basis points. has been determined.

With some attractive opportunities in U.S. debt, Anders Persson, head of global fixed income at NuVene, has recently increased his position in dollar-denominated emerging market bonds due to the uptick in commodity prices.

“When you’re at war between Ukraine and Russia, at the same time there isn’t a clean play-book for the Fed pivot after the pandemic,” he said.

Investors will be watching US non-farm payrolls data next week as they anticipate whether the economy is strong enough to handle the Fed’s aggressive rate-growth trajectory.

To be sure, some investors believe that the time to let go of pessimism is ideal for buying the stock, an idea supported by ample evidence of the defensive position that accompanied the recent surge of the S&P 500. . Analysts at BoFA Global Research said in contrast to them the bull and bear indicator had recently given a “buy” signal based on outflows from equities and credit and higher levels of liquidity in investors’ portfolios.

Adam Heitz, global head of portfolio construction and strategy at Janus Henderson, said the biggest risk for most investors would be to “exaggerate for short-term moves” and jump headfirst into commodities or gold as a hedge against inflation.

Hates is steering clients into high-quality equities with strong cash flow such as dividend stocks, and is seeing increasing investor interest in hedge fund strategies that can take short positions.

“We’re off to a historically poor start to the year, but we’re trying to make sure the cure isn’t worse than the disease,” he said.

This story has been published without modification in text from a wire agency feed.