Parallel declines in US equity and bond markets are pushing investors into cash, commodities and dividend-paying stocks as geopolitical uncertainties and concerns over a tightening Federal Reserve shake asset prices.
As the first quarter of 2022 ended, the S&P 500 is down about 5 percent year-to-date, after falling as much as 12.5 percent earlier in the year. The ICE BofA Treasury Index, meanwhile, fell 5.6 percent this year, its worst start in history.
Investors have traditionally relied on a mix of stocks and bonds to cushion falls in their portfolio, with stocks ideally rising amid economic optimism and bonds gaining in uncertain times.
That strategy can go awry, however, and market volatility due to Russia’s invasion of Ukraine, rising commodity prices and Fed Chair Jerome Powell’s hawkish stance have made the playbook harder to follow this time around.
Although a strong rebound in equities has more than halved the S&P 500’s year-to-date losses, some investors fear the recovery may not last and are looking to reduce exposure.
“We’re in a perfect storm right now,” said Katie Nixon, chief investment officer of Northern Trust Wealth Management.
“We’ve been in times of heightened geopolitical risk before, but this one feels a little different. The negative consequences could be much more serious and widespread.”
George Young, a portfolio manager at Villere, is increasing his portfolio’s cash allocation to nearly 15 percent, well above the typical 3 percent of assets he normally holds.
“Cash literally doesn’t pay and is arguably negative due to inflation, but we don’t see a lot of things that we want to buy,” he said.
The recent declines “have been more painful than many previous bouts of volatility” due to double sell-offs in both stocks and bonds, Michael Fredericks, head of income investing at BlackRock’s multi-asset strategy team, wrote in a statement on Friday.
The bond market has been particularly difficult to generate gains as investors rebalance their portfolios to a Fed that seems poised to do anything to fight inflation.
Benchmark 10-year Treasury yields, which move inversely with bond prices, hit a three-year high of around 2.5 percent last week, with investors now pricing in more than two percentage points of rate hikes this year.
Amid less attractive opportunities in US bonds, Anders Persson, Nuveen’s head of global fixed income, recently increased his positions in dollar-denominated emerging market bonds, in part due to the rally in commodity prices.
“There’s no clean playbook for a post-pandemic Fed pivot while there’s a war going on between Ukraine and Russia,” he said.
Adam Hetts, global head of portfolio construction and strategy at Janus Henderson, said the biggest risk for most investors is “overreacting to short-term moves” and jumping headfirst into commodities or gold as a hedge against inflation.
“We’re off to a historically bad start to the year, but we’re trying to make sure the cure isn’t worse than the disease,” he said.
https://www.independent.ie/business/world/investors-seek-safe-harbour-as-markets-hit-perfect-storm-41492818.html Investors are looking for a safe haven while the markets are caught in a perfect storm