- 2022 has been a rough one for investors, with all major asset classes moving lower in unison.
- A combination of rising interest rates, high inflation and slowing economic growth have weighed on the markets.
- Investors have found little comfort in a diversified portfolio as bonds are down 10% year to date.
It’s been a brutal year for investors.
There seems to be no corner of the market that provides a safe haven for less than half of 2022, and stocks, bonds and the once-high-flying cryptocurrency market are getting crushed.
This means that diversification, a key tenet of a healthy portfolio, has failed to protect investments from a trifecta of risks, including rising interest rates, record inflation and slowing economic growth.
Those three things are a recipe for stagflation, an economic scenario in which inflation is high, economic growth slows, and unemployment rises steadily. That would be bad news for investors, given that the last time the United States dealt with stagflation, in the 1970s, it lost a decade to the stock market.
For now, the only missing element in stagflation is rising unemployment, as recent data indicates a tight labor market and a historically low unemployment rate of 3.6%.
While there has been a spike in layoffs at various tech companies in recent weeks, there are still two job openings for every unemployed person in the US. As long as the job market remains strong, the US economy could avoid a period of economic stagflation.
That would be good news for stock and bond investors. The S&P 500 is down 15% year-to-date, while the Bloomberg-Barclays US Aggregate Bond Index is down 10% over the same period.
Bonds are often negatively correlated with stocks and provide investors with protection during down periods in the stock market. But because rising interest rates lead to falling bond prices, bonds cannot be prevented from falling as long as the
keep raising rates.
This is not the first time that stocks and bonds have fallen in unison. In 2018, both the S&P 500 and the Aggregate Bond Index generated negative returns as the Fed raised interest rates and reduced its balance sheet. Now the Fed is embarking on a similar tightening cycle, but on a much larger scale.
Meanwhile, cryptocurrency investors have also been unable to escape the carnage, with bitcoin down around 30% year-to-date and more than 50% below its all-time high reached in November. What many considered an inflation hedge, given bitcoin’s limited supply of 21 million coins, is proving to be a risky asset heavily tied to tech stocks.
The only asset classes that have been winners in 2022 are commodities and cash. Rising oil prices due to Russia’s war against Ukraine have led to supply constraints and rising oil and gas prices. That has translated into higher profits for energy companies.
And then there is the cash. Even despite inflation at 40-year highs, cash has turned out to be king so far in 2022, with the Bloomberg Dollar Spot Index up 0.6% in 2022. And retail investors are clinging to a large amount of cash. According to ICI data, retail cash in money market funds topped $1.4 trillion last week.
Whether moving away from stocks and bonds toward a safe haven asset like cash is still the right move for investors will be seen later this week when Consumer Price Index data is released. If inflation shows signs of abating, it may give the Fed more breathing room on its rate hike schedule, which could fuel a resurgence in risk assets.
“The biggest buying opportunities of the year tend to come when uncorrelated assets become highly correlated,” Jamie Cox of Harris Financial Group told Insider. “The dam will break in the trifecta of macro events hampering markets very soon. I anticipated that a cessation of hostilities in Ukraine would be first in line, however now it looks like inflation is falling and the need for rapid increases in fees will take the line..”