Texas markets

Inflation-Rocked Markets Leave Investors Nowhere to Hide

(Bloomberg) — For inflation-burned investors, a really bad year is starting to look even worse.

Bloomberg’s Most Read

As stock prices tumbled and bonds suffered the biggest losses in decades, soaring consumer prices turned a few corners of the financial markets into profitable havens earlier this year. Oil prices have recovered. Other products too. Even rising house prices and rents have supported the real estate sector.

But the hiding places are quickly disappearing.

Indeed, the persistent rise in underlying inflation – which eliminates volatility in food and energy prices – is poised to push the Federal Reserve to continue its series of interest rate hikes the more aggressive in decades. And that’s bad news for working people of all stripes.

A new study by researchers from the University of Pennsylvania and the University of Hong Kong has found that stocks, bonds, commodities and real estate investment trusts are all exposed to losses when inflation undercuts. underlying increases unexpectedly, according to data from 1963 to 2019.

“The first half of the year, when energy and food inflation were rising faster than the core, commodities performed well and looked like excellent inflation protection,” said Nikolai Roussanov, professor of finance. at the Wharton School of the University of Pennsylvania. author of the study. “But when energy prices started falling, we saw that correlation reverse and commodities generally don’t do so well.”

The shift comes on top of a darkening outlook for global financial markets, which have been hit hard this year as central banks around the world tightened monetary policy, marking a clean break from the era of easy money. that has helped stocks and bonds rally during the pandemic.

On Tuesday, the US Department of Labor reported that the core consumer price index rose 6.3% in August from a year earlier, the first acceleration since March. The numbers dashed investors’ hopes of a slowdown and cemented expectations that the Fed will raise its key rate by three-quarters of a percentage point for the third consecutive time on Sept. 21.

Such aggressive tightening increases the risk of a sharp economic slowdown that would hurt corporate profits and demand for commodities such as oil.

The S&P 500 index fell more than 4% on Tuesday alone, following the inflation report, and ended the week down nearly 5%. A Bloomberg commodity index has plunged 3% since Tuesday. And Treasury yields have climbed, pushing U.S. government debt to a loss of more than 11% this year, by far the worst since the Bloomberg index began in 1973. The U.S. dollar has been among the few bright spots, the currency driven by rising interest rates.

The evolution of commodity markets is consistent with what has been observed since the early 1960s, according to Roussanov and his fellow researchers. While commodities gain 21% when energy inflation increases by one standard deviation, they actually fall 0.1% when core inflation experiences the same jump.

A similar study by researchers from hedge fund firm Man Group Plc and Duke University also found that stocks and bonds tend to perform poorly during times of inflation, while commodities are the mainstay. asset class that reliably outperforms when inflation is high. But the caveat is that once headline inflation begins to fall from its peak, the return on the asset class tends to be zero, according to one of the authors.

“The whole market and the whole world is sailing from this period of high and rising inflation, which we have been in, to a period of still high, but lower inflation,” said the portfolio manager of Man Group. , Teun Draaisma. “We are on the cusp of that change.”

The shift is fueling a pullback from commodity funds as investors brace for slower economic growth or a recession. Broad-based exchange-traded funds are expected to see cash withdrawn for a fifth consecutive month in September, with nearly $17 billion withdrawn since the start of May.

“With very strong underlying inflation, this implies that aggressive monetary tightening will be in place,” said Peter Chatwell, head of global macro strategies at Mizuho International Plc. “This should reduce near-term demand and depress prices for most assets.”

Bloomberg Businessweek’s Most Read

©2022 Bloomberg LP