New York: Wall Street equities have had the worst start to a year since 1939, while the bond slump is the steepest since 1842, which is sending many investors on the hunt for alternatives.
As US inflation has soared to its highest in four decades, the central bank has begun to raise interest rates aggressively.
And the war in Ukraine and sanctions against Russia, together with Covid-19 lockdowns in China have added to investor anxiety about the prospects for the economy.
“For the first time in over a decade, investors face both a hawkish Federal Reserve and genuine inflation pressure,” said Ross Mayfield of Baird Private Wealth Management.
“This has led to the sort of rate-driven selloff that can hit stocks ... and bonds at the same time.”
With interest rates rising, bond prices are falling - the two move in opposite directions - so they are no longer playing the safe-haven role they usually serve when equities are losing ground.
“It is a very tough environment,” said Anwiti Bahuguna from Columbia Threadneedle Investments.
Uncertainty about the persistence of inflation and the outlook for global economy add to the challenges, said Chaguir Mandjee, portfolio manager at Tailor AM.
“It’s a headache,” he said.
Retail investors share the anxiety.
“I believe this market crash is going to be much bigger than 2008,” one told AFP.
“Right now I am looking to move into a mix of cash and precious metals,” said the investor, contacted on the Reddit social media site, who declined to be identified.
Greg McBride, chief analyst at Bankrate, agreed a lot of investors are moving their funds out of other assets into cash, despite the fact that inflation will cause capital to lose value, unlike the situation following the 2008 global financial crisis.
Art and commodities
Other popular options include money market funds, which are shielded from the vagaries of the stock market but offer little return, as well as term deposits and even simple savings accounts, he said.
Those safe options were shunned in recent years due to low interest rates, often less than 0.50 per cent annually.
After selling off bond holdings at a nine per cent loss, the Redditor found a two-year term account with a 2.65 per cent return.
Bahuguna’s team saw the slide in bonds coming and shifted focus toward commodities, which are now easily accessible to institutional investors and individuals alike.
From precious metals to energy and agricultural goods, commodities are considered a premier anti-inflation weapon.
Index funds - also known as exchange-traded funds or ETFs - which track the prices for particular goods or companies, have won impressive gains since the start of the year, often in excess of 30 per cent.
But even these popular investments are showing signs of running out of steam, after hitting recent records, impacted by the end of cheap credit as well as the specter of an economic slowdown which would weigh on demand for raw materials.
Coffee, copper, nickel and silver have all deflated after a dazzling start to the year, as has gold, which is sometimes seen as a shield against inflation, and bitcoin, which has sunk dramatically in recent weeks.
In addition to commodities, McBride said real estate offers a longer-term option “for those that are just going to hunker down until the situation calms down.”
Since 2019, prior to the pandemic, US median home prices have surged 39 per cent, helped by bargain mortgage rates, and are still rising, according to the National Association of Realtors.
There are some more unconventional options for investors as well, like art and trading cards.
Gregg Love, a small investor, used the Rally site, which allows thousands of investors to share ownership of valuable cards and other objects.
In two years, his capital has increased by 30 per cent but he thinks he can do better.
This principle of fractional ownership energises the entire collecting market, augmenting “the perception of art as a hedge against inflation,” explains Joan Robledo-Palop, founder of Zeit Contemporary Art.
The two factors “have given rise to new collectors in numbers unthinkable just five years ago.”