When stocks and bonds fall together, investors look for alternatives

posted on Sunday, May 15, 2022 at 10:14 am.

Worst start to the year since 1939 for Wall Street stocks and an unprecedented drop in bonds since 1842: to avoid a downturn in two stellar investments, investors are looking for alternatives.

“For the first time in decades, investors are facing both real inflationary pressures and an aggressive U.S. central bank (Fed) determined to tighten its monetary policy to drive prices to the bottom,” explains Baird’s Ross Mayfield.

“This led to a drop that affected both stocks and bonds,” he continues.

As rates rise, bond prices fall (both moving in opposite directions) and they no longer act as a safe haven when stocks swing.

The war in Ukraine, sanctions against Russia and quarantine in China have added to the anxiety of the market, which no longer has confidence. “This is a very challenging environment,” said Anviti Bahuguna, head of all-asset strategy at Columbia Threadneedle Investments.

“It’s a headache in the sense that we don’t yet have well-defined parameters for the persistence of inflation and global growth,” said Chagir Manji, portfolio manager at Tailor AM.

“I am running from the market. (…) I think that this crash will be even worse than in 2008,” says a small carrier who contacted via the social network Reddit and did not wish to give his name. “Now I plan to go into cash and precious metals.”

“A lot of investments go into cash,” investors sell their assets to keep only cash, confirms Greg McBride, chief analyst at Bankrate, even if, unlike the 2008 financial crisis, inflation results in a mechanical loss of capital value.

– Art and Materials –

Another direction at the moment, he said, is cash, financial products that bring little, but are considered very safe and relatively protected from stock market shocks.

In the same vein, bank-guaranteed time deposits or savings accounts. They have been shunned in recent years due to very low interest rates, often less than 0.50% per annum, but they are becoming attractive again.

Selling his bonds for a 9% loss as a result, the small Reddit holder thus found a two-year forward account at 2.65%.

The Anwiti Bahuguna team says it saw the coming downturn in bonds and refocused on commodities, which are now readily available through funds for both institutional investors and individuals.

From precious metals to energy and agricultural commodities, commodities are considered inflation-fighting weapons par excellence.

Index funds (also called ETFs) that track the prices of these materials or companies in their sector have posted daring returns, often in excess of 30%, since the start of the year.

But even these providential investments show signs of fizzling out. Consequences of the recent record level, as well as the end of cheap credit, with, in addition, the specter of an economic downturn that will reduce demand for raw materials.

Coffee, copper, nickel or silver are in the process of setting sail after a brilliant start to the year, as is gold, a bit hastily presented as a shield against inflation by some, just like bitcoin is in turmoil today.

In addition to raw materials, “for those who want to make the transition” more prominent than a simple step aside, “for longer, there is real estate.”

According to the National Association of Realtors (NAR), since 2019, before the pandemic, the median home price in the US was 39% and continues to rise.

What remains are alternative investments, such as collectible cards, which Gregg Love, a small-time saver, bought a plot at the Rally site, which divides ownership of the valuable object among thousands of contributors.

In two years, his capital has increased by 30%, and he thinks he can achieve more.

This principle of fractional ownership activates the entire collecting market, as well as “the perception of art as insurance against inflation,” explains Joan Robledo-Palop, founder of Zeit Contemporary Art. These two factors “spawned a new generation of collectors whose numbers would have been unimaginable five years ago.”