The first quarter of 2022 was one of the toughest in decades for investors with a neutrally balanced portfolio, writes Bloomberg on the basis of its own data. The S&P 500 fell by 4.9 percent, US treasuries lost 5.6 percent and investment grade even fell by 7.8 percent.
Admittedly though, the first quarter was not as bad as in 2020, when the crisis at the start of the Covid-19 pandemic triggered a very sharp plunge, with the S&P falling by 20 percent in just a few weeks. The tide was only turned by the rapid intervention of central banks, including the ECB and the US Federal Reserve, which successfully came to the rescue of the markets with pandemic support packages.
For investors with 60-40 portfolios, the first quarter of 2022 was one of the worst periods since the early 1980s. The poor performance of the neutral portfolio is due to a combination of high inflation, the war in Ukraine, and rising energy and oil prices, said Bloomberg. US stock and bond markets lost more than $3,000 billion in the first quarter.
Investors turned around portfolios
A simultaneous shock in both equity and bond markets to such an extent is rare. The reason is that equities were at a historic high, at the end of 2021, while bond yields had reached historic lows and inflation was accelerating.
Investors seized the market shock and turned their portfolios around. They moved into bonds with shorter maturities, pushing longer-term debt rates above those of shorter-term paper, inversing yields. This often is seen as a signal that the economy is moving towards recession.
US stocks were at their worst point this quarter, losing more than 13 percent, while the technology exchange Nasdaq even dipped below 20 percent. Stocks recovered strongly during the quarter - even despite the war in Ukraine - as equities are also seen as a hedge against inflation.
The 60/40 portfolio in the US fell by an average of 4.6 percent, according to Bloomberg data. Equities outperformed bonds, partly because of uncertainty about the monetary policies of central banks such as the Fed. The only asset class that proved a good refuge was commodities. The Bloomberg Commodity Index rose 25 percent in the first quarter - indeed, it was the best quarter for commodities since 1990.
Equities to the rescue
Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management, is optimistic. He tells the Bloomberg news agency that the S&P has cut half of its losses, encouraged by improvements in the global supply chain and confidence that the Fed’s interest rate policy will have an effect.
According to LPL Financial in Boston, the first-quarter loss in a portfolio composed of 60 percent in S&P 500 shares and 40 percent in bonds, as per the Bloomberg aggregate U.S. Bond index was limited to 4 percent in the first quarter. It was, except for 18 other cases, the worst performance in 185 quarters since 1976, and the worst result since 2008 when the neutral portfolio lost 11 percent.
The neutral portfolio has held up reasonably well largely because of the recovery of equities. The S&P had fallen more than 13 percent year-to-date on 15 March, but now the index is only 5 percent below its peak. Valuations are now closer to their historical average. Typically, stocks recover when the 10-year Treasury yield falls below the two-year rate, as was the case on Thursday.
Going long takes courage
JP Morgan strategists believe the market remains too risk-focused and that a more risk-averse stance in portfolios is warranted now. UBS added that since 1965, the S&P 500 has averaged 8 percent in the 12 months following an inverse yield. Since 1978, it would even be an average return of 11 percent, Truist IAG told Reuters.
Joe LaVorgna, the chief economist of Natixis in the United States, said that the two-year Treasury index had fallen the sharpest ever, even more than in bond markets in the early 1980s and 1994. “Someone with courage is going long now. The market is pricing in a lot of Fed tightening, probably too much. That gives me confidence that we will see a rally at some point, probably faster than thought.”
The advantage of rising interest rates is that the number of bonds with negative interest rates is declining. At its peak in 2020, that was still $18,000 billion; now it is less than $3,000 billion. The total loss that bond investors have suffered on their debt is $2400 billion.
Virtually all bond markets are under pressure. The exception to the rule is China, which seems to have inflation under control. The return on the S&P China Government Bond Total Return Index over the past 12 months is 5.23 percent.
This article originally appeared in Dutch on InvestmentOfficer.nl
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