Stocks and Bonds Are Falling in Lockstep at Pace Unseen in Decades

Stocks and bonds are falling in tandem at a rate not seen in decades, leaving investors with little place to hide from market volatility.

As of Friday, the S&P 500 is down 13% for 2022, and the Bloomberg US Composite bond index – largely US Treasuries, appreciated corporate bonds and mortgage-backed securities – down 9.5%. That puts them in for the largest simultaneous decline in Dow Jones Market Data since 1976. The only time both indexes fell during the year was in 1994, when the bond index fell 2.9% and The S&P 500 fell 1.5%.

It is the latest dilemma for investors struggling to manage the highly volatile financial markets around the globe. This year’s drop has dealt a blow to the 60/40 portfolio model — a combination of 60% stocks and 40% bonds that has long been touted as providing strong returns and hedging against the infrequently expected fall for stocks, which are generally considered much riskier than bonds.

That fence has evaporated this year. Investors dumped both stocks and bonds as the Federal Reserve embarked on a campaign to raise interest rates to combat inflation, which is at a 40-year high. Even the safest investments, Treasury, have plummeted.

Several investors are approaching the commodities market, including John Cunnison, chief investment officer at Baker Boyer Bank, who has increased bets on stocks tied to metals and natural resources. But concerns about commodity prices following a sharp rally on inflation fears left others feeling nervous.

“There is no silver bullet,” Mr. Cunnison said. “Everywhere we can, we are trying to find ways to diversify assets.”

Trends in the bond market deepened on Monday, with 10-year Treasury yields touching 3% for the first time since 2018. Some investors warn it’s still early — and Bond prices may continue to fall. During the Fed’s last rate hike cycle – which ended in December 2018 – Treasury yields didn’t touch 3% until later that year, near the end of the cycle.

The Fed was poised on Wednesday to raise interest rates by half a percentage point, marking the first hike of that magnitude in 22 years. Investors are expecting more rate hikes to come: Interest rate derivatives show investors expect the Fed to raise its benchmark federal funds rate above 3% next year, from the current level is between 0.25% and 0.5%.

Mr. Cunnison said he has cut his exposure to bonds that mature much later and are more sensitive to interest rates. The rally in commodity prices this year – from oil to soybeans and oats – has raised concerns about inflation and skepticism about how the Fed can tame it without pushing the economy into recession.

High inflation also makes some investors reluctant to pour more money into bonds despite the turmoil in the stock market. Inflation can reduce the purchasing power of the fixed payments that bonds provide. As a result, some investors say they will stick to the stock until volatility hits.

The S&P 500 just ended its worst month since March 2020, while many tech stocks were hit harder. The Nasdaq Composite is down nearly 20% this year, and shares of many of the tech heavyweights that have driven the market higher in recent years are posting double-digit losses.

“There have been a lot of days when I open my Bloomberg screen and everything is red and I have to squint,” said Josh Kutin, head of asset allocation for North America at Columbia Threadneedle Investments. to see what the green number is. oversees about $90 billion in assets.

The inversion of the US Treasury yield curve has been seen as a warning sign of a recession for decades, and it looks like it’s about to brighten again. WSJ’s Dion Rabouin explains why an inverted yield curve can be so reliable in predicting a recession and why market watchers are talking about it now. Illustration: Ryan Trefes

Mr. Kutin said he is still holding more stocks than the benchmark he tracks, because he expects high inflation to continue to affect bond prices. He said investments in corners of the market such as commodities have helped protect some of the company’s portfolio.

Some individual investors, especially those who rely on their portfolio returns for income in retirement, have been burned by the recent volatility. Yet despite the chaos, US stock funds raked in more than $81 billion in assets this year through the end of April, according to data from EPFR. Bond funds and money markets have lost more than $250 billion in total.

Fred Wallace, a 67-year-old retiree living in Los Angeles, said he has sold some of his bonds and now keeps more of his portfolio in cash and stocks. He’s discounting bonds.

“I have maintained a fairly solid equity position that has spread northward over the past few years,” said Mr. Wallace.

His allocation to stocks has recently increased to about 70%, up from about 65% at the end of 2020. He is poised to weather the volatility.

“I believe the market will always come back,” he said.

However, some investors think it is not wise to invest in bonds, despite the large losses this year.

The Fed’s outlook on interest rates can change rapidly as the economy evolves. It is not yet clear how a rising exchange rate will impact the job market and affect consumer spending. It seems that some Americans are raising prices that are more sensitive to big-ticket items. And new data last week showed the economy shrank last quarter for the first time since the pandemic broke out.

That will have an impact on the bond market, said Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, based in Cleveland.

“I am not going to give up a fixed income,” Ms. Rathbun said. “Anything that goes straight up, sometimes goes down,” she said, pointing out that yields will rise sharply this year due to falling bond prices.

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Write to Gunjan Banerji at gunjan.banerji@wsj.com

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Edmund DeMarche

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