NEW YORK (Reuters) — Parallel declines in U.S. equity and fixed-income markets push investors into cash, commodities and dividend-paying stocks, as geopolitical uncertainty and concerns over a hawkish Federal Reserve drive prices higher actives.
With the end of the first quarter of 2022, the S&P 500 is down about 5% year-to-date, having fallen 12.5% earlier in the year.
The ICE BofA Treasury index, meanwhile, recently fell 5.6% this year, its worst start in history.
Investors have traditionally relied on a mix of stocks and bonds to cushion declines in their portfolio, with stocks ideally rising amid economic optimism and bonds strengthening in times of uncertainty.
This strategy can go wrong, however, and market swings resulting from Russia’s invasion of Ukraine, soaring commodity prices, and the Fed’s hawkish tilt have combined to make it harder to follow the playbook this time around.
Although a sharp rebound in equities has more than halved the S&P 500’s year-to-date losses, some investors fear the rebound won’t last and are looking to trim their exposure.
“We’re in a perfect storm right now,” said Katie Nixon, chief investment officer of Northern Trust Wealth Management. “We’ve seen periods of heightened geopolitical risk before, but this one looks a bit different. The negative outcomes could be much more severe and broader.”
Nixon is increasing its holdings in agricultural and energy companies, as well as real estate investment trusts or REITs, which have acted as an inflation hedge in the past.
Investors moved $13.2 billion in cash and $2.1 billion in gold over the past week, according to data from BoFA Global research.
U.S. stocks saw outflows of $3.1 billion, the largest in nine weeks.
The company’s latest survey showed that fund managers’ cash positions at the start of the month were at their highest level since March 2020.
George Young, portfolio manager at Villere & Co, is increasing the cash allocation of his portfolio to nearly 15%, well above the 3% of assets he normally holds.
“Money literally does nothing and is probably negative because of inflation, but we don’t see a lot of things that we want to buy,” he said.
The recent declines have “felt more painful than many previous episodes of volatility” due to the double selloff in stocks and bonds, wrote Michael Fredericks, head of income investments for the multi-asset strategies team at BlackRock, in a note Friday.
He’s increasingly bullish on dividend-paying stocks, which trade at lower price-to-earnings valuations than the broader S&P 500, and are less sensitive to rising interest rates than stocks or growth bonds.
Gains have been particularly hard to come by in the bond market, with investors recalibrating their portfolios towards a Fed that looks set to go all out in its fight against inflation.
Yields on the benchmark 10-year US Treasury, which move inversely to bond prices, hit a three-year high of around 2.5% last week, with investors now pricing in more than 200 basis points tightening interest rates this year.
With few attractive opportunities in US debt, Anders Persson, head of global fixed income at Nuveen, has recently increased his positions in dollar-denominated emerging market bonds, in part due to rising commodity prices. raw. “There is no clear playbook for a post-pandemic Fed pivot at the same time that you have a war between Ukraine and Russia,” he said.
Investors will be watching US nonfarm payrolls data this week as they assess whether the economy is strong enough to handle the Fed’s aggressive rate hike path.
To be sure, some investors believe that periods of prevailing pessimism are ideal for buying stocks, a view supported by ample evidence of the defensive stance that has accompanied the recent rebound in the S&P 500.
BoFA Global Research analysts said their bullish and bearish contrarian indicator recently gave a “buy” signal based on equity and credit outflows and high levels of cash in investors’ portfolios. .
Adam Hetts, global head of portfolio construction and strategy at Janus Henderson, said the biggest risk for most investors would be to “overreact to short-term moves” and jump headlong into commodities or gold as a hedge against inflation.
Hetts is steering clients toward higher quality stocks with strong cash flows such as dividend-paying stocks, and is seeing increased investor interest in hedge fund strategies that can take short positions.
“We have a historically bad start to the year, but we are trying to ensure that the cure is not worse than the disease,” he said.