Not only are rising prices stalling the economy and increasing the risk of recession, they are debunking the value of what is left of an investor’s equity gains. Since the pre-Covid peak in February 2020, the S&P 500 has appreciated 11% annually, well above the historical average. But inflation was at 5.2% over the same stretch, eating up almost half the equity growth.
It’s a brutal one-two punch that gets worse in the smaller lens, this year’s 14% drop made worse when stacked next to rising consumer prices. Adjusted for inflation, the S&P 500 is valued at an annualized rate of about 40%, worse than in any full year since 1974, data compiled by Bank of America Corp. shows.
The data counters a popular legend that stocks can serve as a haven in times of hot inflation. They also show the danger of following any old playbook in a post-pandemic world where the Federal Reserve begins an aggressive rate-hike cycle to stifle growth.
With the exception of commodities, all major financial assets have lost real money over the past year, including bitcoin, something that crypto bulls once touted as a store of value.
“We are now in the worst part of the market cycle,” 22V Research founder Dennis Debushere wrote in a note on Monday. Inflation/economic growth figures are stubborn, and markets are waiving significant tightening, but with still high uncertainty over how much more the Fed needs to do to slow growth/inflation.”
Bitcoin has lost nearly a third of its value since pricing pressure mounted in April 2021 as investors abandoned riskier assets in anticipation of tighter central bank policy.
Fixed income has also suffered deep losses. Investment-grade bonds are down 10% in the past year, followed by Treasuries down 7% and higher yields down 5%. Even as those acting as inflation hedges are losing money, the Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP) and the iShares TIPS ETF (TIP) are slipping 3% and 6.7%, respectively. .
Betting on stocks as a portmanteau during an inflationary storm didn’t work either. The S&P 500’s 1% decline over the past year translates into a real loss of about 10%, when the latest annual inflation is 8.5%.
Real returns are even worse for the tech-heavy Nasdaq 100 and Russell 2000 small-cap stocks, which are down 15% and 25%, respectively.
“Anyone who tells you we’re in a bull market has a lot to do,” said Mike Wilson, chief US equity strategist at Morgan Stanley. “Perhaps, the stock is no longer the inflation hedge investors expect.”
That argument held that Corporate America benefits in an environment of high inflation in part because it can pass rising costs on to end consumers. And the flexibility in earnings can help stocks thrive.
The profit estimates for this year and next year have increased over the last 12 months. Yet even with the Fed’s commitment to raising rates to fight inflation running to a four-decade high, the specter of high borrowing costs have sparked a quick revaluation of equity valuations and a broad sell-off.
Commodities have rallied, with Bloomberg’s measure tracking a climb of more than 40% over the past year from oil to wheat. Nevertheless, strategists at Société Générale led by Andrew Lapthorne warned investors not to lean too heavily on the asset, due to its “notoriously volatile” prices that could be triggered by unknown factors such as geopolitical events or seasonal variations. may be affected.
“We want supply and demand to be balanced by an economic downturn or, worse, a recession, until a tightening point occurs,” Lapthorne wrote in a note last week. “In that respect, commodity prices, bond yields and equities are all involved in a game of chicken with central banks tightening up. If central banks are successful, these inflation hedges will become problematic.”
To mitigate risk, the team created a multi-asset model to hedge against inflation. In commodities, instead of betting on further gains, he developed a trend following strategy to ride the volatility and price flow. Likewise in bonds, they tend to have volatility in yields over a long period of time, as opposed to placing a lump sum bet on a continuous rise in rates. In stocks, the model calls for better returns from the market versus the inflation beneficiary.
“We are simply changing the implementation of the traditional inflation hedge,” Lapthorne said. “We like the logic of having the problem (commodities) longer, the longer the response to that problem (rate volatility) and the longer being the beneficiary of the problem (inflation-linked equities).”
This story has been published without modification in text from a wire agency feed. Only the title has been changed.