Stocks and bonds ‘disaster discounted’ after investors’ worst streak in 20 years

Things can always go wrong.

S&P 500 SPX Index,
Friday consolidated the worst monthly percentage drop since the pandemic shutdowns in March 2020, but also joined the Dow Jones Industrial Average DJIA,
and Nasdaq Composite Index COMP,
The first extended period in the nine-month period held the worst since 2002, according to market data from Dow Jones.

“The problem is that at the end of last year, we were priced to perfection, and now we are giving up a catastrophe,” David Kelly, chief global strategist at JPMorgan Asset Management, said by phone.

“I don’t think any of us can remember a time for both stocks and bonds – probably going back to 2008 – that went as badly as this year.”

But with the carnage, Kelly and others also see an opportunity to snap up battered stocks and bonds, without waiting for the market to bottom out or the Fed to end its fight against inflation.

Carnage: a look at the costs

Stocks and bonds have been particularly hard hit since Russia launched its war on Ukraine in February, or a month before the Federal Reserve began raising interest rates from nearly zero.

Government bond yields came in at -9.1% (see chart) six months into the Ukraine war, according to BofA Global, a sharp drop from the same time frame as other wars in the past 70 years.

Bonds and stocks hard hit by the Ukraine-Russia war

Bank of America Global

Russia Intensification of the war against Ukraine It has obviously fueled inflation around the world, frightened markets and exacerbated it Energy crisis in Europe. The global trend to safer assets also pushed the US dollar so it’s higher In September, DXY,
As concerns escalate over potential damage to emerging markets and US corporate profits.

There is also the roaring US labor market, which is unlikely to calm down when the August jobs report arrives next Friday, Key Economic Data Point Next week the Fed and the markets.

James Ragan, Director of Wealth Management Research at DA Davidson & Co. , in a phone call: “Obviously a lot of market weakness is due to the Fed.” They have made it clear that they want to see the job market pull some. This is really important.”

In the end, though, bond yields nearly doubled this year as the Federal Reserve raised its benchmark interest rate sharply to combat Highest level in 40 years inflation. This dynamic has attracted investors to look for deals, while also holding them On alert for the upcoming crisis in the markets.

As a cautionary tale, a credit strategist team from Bank of America (BofA Global) cited the “collapse in UK assets last week” and called the Bank of England. Emergency response to the purchase of bonds Warning to other central banks.

“The Fed has a tough choice: go slower from here or risk the BoE’s experience of having to repair the damage,” they warned, in a weekly note to a client.

However, some investors are also seeing opportunity with stocks and bonds down more than 10%-25% (see chart) over the year, according to data from Mizuho Securities.

Stocks and Bonds Decline in 2022

Mizuho Securities Exchange Inc

The damage looks particularly severe when compared to annual gains for stocks, bonds, housing and commodities in a typical year over the past five decades or so.

Bond and Equity Yields Record Gains in Regular Years Since 1975

Mizuho Securities Brokerage

Corporate earnings estimates are fading

While investors are concerned that the stock market’s trajectory may continue for a while, particularly as earnings expectations fade, confidence is growing among bond investors eyeing higher returns today.

US investment-rated companies Bond yields were 5.7% This week, the highest level since 2009. The 10-year Treasury yield TMUBMUSD10Y,
It rose to 3.8% on Friday, posting its highest three-quarter yield gain since 1987, according to market data from Dow Jones.

The bond moves come as corporate earnings growth estimates for the S&P 500 drop to 2.9% for the third quarter, year-over-year, according to FactSet data. This represents a sharp revision from the expected rate of 9.8% at the start of the quarter.

Against this background, Ed Burks, CIO and lead portfolio manager for the Franklin Income Fund, favors investment-grade corporate bonds that also fetch average dollar rates of $86, versus more than $110 a year ago.

Individual investors are often exposed to the sector through corporate bond exchange-traded funds, the largest of which is LQD,
-0.25%And the
iShares iBoxx US Dollar Investment Grade Corporate Mutual Fund

“We think a lot of the damage has been done in this asset class, while in stocks we It is being reissued. “It’s changing fast right before our very eyes,” Birx said.

US stocks fell sharply on Friday to conclude a bad month, with Dow Jones and Standard & Poor’s ending the session 1.7% and 1.5% down, respectively, to their lowest levels since November 2020, according to market data from Dow Jones. The Nasdaq fell 1.5%, its lowest closing level since July 2020.

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