Bonds, Stocks And Funds Getting Slammed And Dunked In 2022

Up until approximately last November, you bought this stock, you bought that stock, and everything floated generally higher. High-tech stock were on a run with the bulls, and there were very few bears in sight. The value of most portfolios were on the rise, and then came inflation and the Fed. From there, people worried about a recession and the world had turned.

Since that point in time, and especially as 2022 dawned, bonds, stocks, funds, you name it, are getting slammed and dunked. One large mistake that many people made, in my opinion, was to think that it was going to be either inflation or a recession as separate entities.

Think again.

Inflation can start a recession, drive a recession, and be a central part of a recession. If this hasn’t been a part of your thinking, then welcome to Mark Grant’s Book of Revelations. With inflation, of course, has come the Fed and their efforts to end it. The rise in yields, from the lowest levels since April, accelerated after San Francisco Fed President Mary Daly said the central bank is “nowhere near” being almost done in fighting the hottest inflation in four decades. Then, Chicago Fed President Charles Evans signaled that the central bank needs to keep raising rates next year to contain price pressures. On top of that, Minneapolis Fed President Neel Kashkari said that the Fed’s “a long way away from” achieving the central bank’s target.

The worst of the bond lot, according to Bloomberg data, are investment grade corporate bonds, which are down 11.07% since the beginning of the year, while the best of the bond lot are municipal bonds, which are only down 6.42%, but the entire fixed-income market is swimming in red ink. What’s more impactful, from here, is that the ink is going to get even redder, in my view. We are nowhere close to the bottom yet. I think the Fed funds rate is headed toward 4.00%, and this will drive the rest of the yield curve even higher.

Along with the Fed’s forceful gyrations, we have the collateral damage. Borrowing costs are rising, and rising dramatically. This will have a major impact on real estate, mortgage rates, corporate earnings as companies refinance their debt, bond ratings, and credit card debt, just to name a few areas that will be seriously impacted. As a matter of fact, credit card debt rose by 13% on an annualized basis in the second quarter. This is the largest increase since 1999, according to a Fox Business article. Consumers are just getting hammered.

Then you have the dollar, which is strengthening rapidly and just shy of parity with the euro. Here, many international American companies will feel the pain, and it will be reflected both in their earnings and profits. These numbers also will not be friendly for the stock markets as valuations and multiples decline. The Nasdaq is already down 20.78% year-to-date, according to Bloomberg data, and “Watch out below!” is the cry on the equity battlefield.

With a combined inflation rate – using the CPI and the PPI – of 10.2% now, the value of cash has also declined. If you get 1.00%, in some money market account, it means that your money is 920 basis points under water. There are times where “cash is king,” but I do not think that this is one of them.

The only way that I see out of our dilemma is income. If you can find anything that yields more than the inflation rate, then you are still in the game. I prefer funds or notes that accomplish this and that pay monthly, as they give you the opportunity to possibly buy at lower prices and even higher yields in this environment. In fact, it is a kind of floating rate strategy, as every month, “Here’s the money.” You can spend it or reinvest it, depending upon your needs and desires.

I recall the phrase, “When the going gets tough, the tough get going.” This is exactly where we are, in my opinion – in a tough spot – and we all need to get going. This will all turn eventually, but we are not there yet. We unfortunately have to deal with many complexities now, and insight and creativity are called for, along with common sense. When the old strategies no longer work, then we have to pivot – which is exactly what I am calling for now.

As you go at it, “bear” in mind, so to speak, the famous words that Christopher Robin said to Mr. Pooh. “You’re braver than you believe, and stronger than you seem, and smarter than you think.”

So, think it over and think it under.

Original Source: Author

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