(Bloomberg) — Investors tied to the Federal Reserve are suffering as all asset classes post losses that aren’t expected to ease anytime soon.
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Five major exchange-traded funds that track stocks, bonds or commodities are poised for first week losses of the month. They have each fallen by at least 0.8% in four trading sessions, and their synchronized drop would have marked their third worst since October.
The widespread decline came as the central bank reiterated on Wednesday that it sees renewed strength in the economy as long-term borrowing costs remain. In a survey, 12 of 19 officials said they expect another rate hike this year and expect a smaller cut than previously expected, partly because of a stronger labor market.
“Many investors were expecting the Fed to adjust market expectations — they were thinking the Fed would adjust its thinking to be more in line with the markets,” said Chris Gaffney, president of global markets at Everbank. “And instead the Fed is holding tight and now the market has to adapt to the Fed.”
Read more: Fed signals higher-to-longer rate hikes near end
The S&P 500 index fell for a third straight day on Thursday, with the index down 2% from that range. The Nasdaq 100 fared worse, losing 3 percent. And there could be more pain if the Fed sticks to its higher-to-longer message, which could signal real output and spur broader selling, HSBC Holdings plc reported.
The central bank is more hawkish than the market and real yields may rise again in the high interest rate scenario. HSBC strategists Max Kettner and Duncan Thoms said such a setting is “worrisome” and could result in sales prices similar to those in 2022. The pair shows that higher real yields over the past two years have tended to hurt stocks and sovereign bonds.
Only dollars – and potential derivatives – can look attractive in multi-asset allocations in such a risky environment.
“This creates a ‘twisted Goldilocks’ environment, which contains unequivocally positive non-equity or asset classes, but where the US dollar is doing really well, and cyclical asset classes like financials or energy are also doing well,” he wrote in a note. In the year Looking ahead to 2024, we continue to think this is the most likely outcome.
But instead of seeing Goldilocks forever — as it has in 2019 and 2021 — there could be some bumps in the road this time around because the change in inflation is “really important,” Ketner said. A drop from 4.5% a decade ago to 3% is hardly noticeable today.
Following the Fed’s hawkish stance, U.S. 10-year Treasury yields have lagged behind global equity yields, Societe Generale Albert Edwards said in a note, marking the highest level in several decades. Strategist likened the current situation to 2007, “before everything fell apart.”
“How Much Pain Can Stocks Bear Now from Rising Bond Yields? Probably not,” he wrote. “Remember the federal model?” He added, referring to the theory that stocks must yield high yields to remain competitive.
The pullback in both bonds and stocks is especially painful for the popular strategy of allocating 60% of your money to stocks and 40% to bonds. The 60/40 model gauge is down 2% so far in September. With the 60-day correlation between the S&P 500 and benchmark Treasuries rising to its highest level since February, increasing lock-up activity is calling into question the role of fixed income as a hedge against riskier assets.
Meanwhile, billions of dollars flowed into technology funds last year, with the sector seeing nearly $40 billion in total global inflows, according to EPFR and Haver data compiled by Deutsche Bank through September 13. Money has also flowed into the consumer-goods sector, as well as telecoms and industries. But the current backdrop may not bode well for investors in technology but underweight energy, a sector that has been rallying in recent weeks, said Bob Elliott, CEO and CIO of Unlimited Funds.
“Advanced technology reviews, longer-term yield increases and higher oil prices are setting this position up for squeeze,” Elliott tweeted Thursday.
–With assistance from Katie Grefeld, Isabelle Lee, and Denisa Tsekova.
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