The primary U.S. stock market benchmark is still close to entering a bear market, as investors worry about the Federal Reserve’s capacity to control inflation without sinking the economy, fueling fears of stagflation – a toxic combination of poor economic growth and persistent inflation.
It’s not only affecting stock prices.
Stagflation is “an awful environment” for investors, according to Nancy Davis, founder of Quadratic Capital Management, because stocks and bonds lose value at the same time, wreaking havoc on standard portfolios split 60 percent between stocks and 40 percent bonds.
In 2022, this was already the case. Bond markets have lost momentum as Treasury yields, which move in the opposite direction of prices, have risen in response to rising inflation and predictions of aggressive monetary tightening by the Fed.
Stocks have been on a downward trend since the S& P 500 index set a new high on Jan. 3 this year, putting the large-capitalization benchmark on the edge of formally entering the bear market territory.
Through Friday, the iShares Core U.S. Aggregate Bond ETF AGG, -0.43% was down more than 10% year to date.
It is based on the Bloomberg U.S. Aggregate Bond Index, which includes Treasury bonds, corporate bonds, municipal bonds, mortgage-backed securities, and asset-backed securities. Over the same period, the S& ;P 500 SPX, +2.39% is down 15.6%.
In a note published this week, analysts at Montreal-based PGM Global stated that the situation leaves “practically nowhere to hide.”
They said, “not only are long-term Treasuries and Investment Grade credit moving nearly one-for-one, but selloffs in long-term Treasuries are also coinciding more frequently with down days in the S&P 500.”
On Wednesday, investors seeking solace were disappointed.
The eagerly awaited April consumer price index showed that annual inflation slowed to 8.3% from a more than four-decade high of 8.5% in March, but economists had expected a more pronounced slowing, and the core reading, which excludes volatile food and energy prices, showed an unexpected monthly increase.