The changing world order comes with a new battle between financial assets, and commodities are winning.
- Stocks and bonds are falling simultaneously, destroying the relationship that has guided portfolio allocation for decades.
- Investors are turning toward precious metals and defensive sectors in the stock market, signaling a longer-term move away from high-flying, unprofitable tech companies.
- The Fed will no longer hold the stock market’s hand. Inflation has taken all their attention, leaving stocks to fend for themselves.
Paper Assets vs. Hard Assets
January, February, and March of 2022…a quarter for the history books. Perhaps the following headlines from the Wall Street Journal encapsulate the fundamental economic change that has occurred this year:
Hardika Singh: Commodities Finish Best Quarter in 32 Years
Sam Goldfarb: Bond Market Suffers Worst Quarter in Decades
Justin Baer and Will Horner: Stocks Drop as Investors Fret About Fed’s Plans to Tame Inflation
The stage is set for an epic battle between paper assets (stocks, bonds) and tangible assets (gold, commodities). For the last 40 years, investors grew comfortable with a 60/40 allocation to equities and fixed income. Stocks delivered performance while bonds functioned as a safe haven, and everyone was happy.
Now, the 60/40 portfolio is getting absolutely crushed. The Fed is tightening monetary policy after decades of ultra-low interest rates, money supply growth, and quantitative easing (all of which benefit the traditional 60/40).
Just look at equity and bond performance compared to commodities in recent months:
The Bloomberg Commodity Index is up 25% so far this year. This index tracks a basket of commodities in six categories:
- Energy (crude oil, natural gas)
- Grains (corn, soybeans)
- Industrial metals (copper, aluminum)
- Precious metals (gold, silver)
- Softs (sugar, coffee)
- Livestock (cattle, hogs)
The NASDAQ 100, a popular stock market benchmark, is down 12% so far this year. The NASDAQ 100 is geared toward technology companies, which struggle when interest rates rise. Technology stocks have led the recent downturn. Those stocks that have faired well in recent months reflect tangible and intrinsic value, such as utilities, real estate, and consumer staples.
The Vanguard Total Bond Market ETF is down 8% this year. When bond yields rise, bond prices drop. Yields have been skyrocketing the past few months in preparation for the Fed’s rate hikes.
The Federal Reserve has officially severed its friendly relationship with the stock market. Even Federal Reserve Governor Lael Brainard, who insisted on keeping monetary policy loose last year, spoke out this week about the dire need to control inflation.
As she awaits Senate confirmation to become vice-chair of the Federal Reserve, she will champion a new wave of policy tightening. The Fed’s hawkish pivot has already destroyed bond prices. This year, bond investors suffered the worst losses in decades and will likely continue to do so.
Investors are desperately searching for an alternate safe haven, and gold is answering the call. Gold shines as the perfect safe haven in this environment. Rising inflation, negative real yields, and stock market weakness all mimic 70s-style stagflation, during which the gold price rose over 1,500%.
Don’t you wish you could have purchased a few ounces of gold back then for $35 an ounce?
Today we sit at $1,924/oz.
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As always, thank you so much for reading – and happy investing!
Global Bond Selloff Deepens as Fed Steps Up Tightening Rhetoric (Yahoo Finance)
Weaponisation of finance: how the west unleashed ‘shock and awe’ on Russia (Financial Times)
Commodities Finish Best Quarter in 32 Years (Wall Street Journal)
Stocks Drop as Investors Fret About Fed’s Plans to Tame Inflation (Wall Street Journal)
Bond Market Suffers Worst Quarter in Decades (Wall Street Journal)
Horrors of Bucha Push Europe Toward New Sanctions on Russia (Yahoo Finance)