Analysis: Rare double whammy hits investors: steep slumps for both stocks and bonds
19/05/2022 05:30
By David Randall and John McCrank
NEW YORK, May 19 (Reuters) - From meme-stock enthusiasts to
retirees, this year's steep dive for both stocks and U.S.
Treasury prices has upended portfolios for individual investors
who had enjoyed watching their wealth grow during the historic
rally in financial assets early in the coronavirus pandemic in
2020.
Wall Street's brutal tumble continued on Wednesday, with the
worst one-day loss since June 2020 for the S&P 500 .SPX . The
benchmark index is now down 17.5% from its peak at the start of
the year, erasing $499 billion in market value. At one point the
S&P was down nearly 20% and on the cusp of confirming a bear
market.
Unlike many past market selloffs, this downturn has also
slammed U.S. Treasuries prices, pushing up yields, as the
Federal Reserve began to reverse the easy money policies that
supported the economy during pandemic lockdowns.
Growing more pessimistic, retail traders sold $87 million in
equities on net in the past week up to Tuesday, versus a
one-year average of $3.3 billion in net buys, according to a
note from JPMorgan.
Normally, Treasuries have been considered among the world’s
safest investments. But so far in 2022, the ICE BofA US Treasury
Index is down 9.3%, the worst start to the year for Treasuries
since 1830 according to Deutsche Bank. This has slammed
investors who counted on the bond market for income and as a
buffer against potential stock market losses.
"Most investors have never seen a market environment like
this," said Christine Benz, director of personal finance at
Morningstar. "It could get worse before it gets better, and that
will really test investors' patience."
Many high-flying growth and tech stocks soared during the
pandemic, and their steep decline has rattled investors who had
bet on them, hoping for the kind of eye-popping rallies seen
early last year in GameStop GME.N and other so-called meme
stocks.
"What I’m seeing is the same thing everyone else is seeing
who started 18-to-24 months ago, like, 'oh, look at all of the
green, going up, up, up,' and then all of a sudden it’s like,
'oh crud, what is happening?'", said Alex Rutfield, 29, an
engineer in the Boston suburbs who has invested over $50,000 in
stocks and ETFs that include internet and robotics firms. He
said the value of his portfolio has fallen back to around even.
DOUBLE WHAMMY
The dual selloffs in stocks and bonds have been particularly
difficult on individual investors who counted on a mix of stocks
and bonds to blunt declines in their portfolios, with stocks
ideally rising amid economic optimism and bonds strengthening
during turbulent times.
That strategy does not work when stocks and bonds fall in
unison. The BlackRock 60/40 Target Allocation fund, which
follows a standard portfolio technique of keeping 60% of its
assets in equities and 40% in fixed income to limit risk, is
down nearly 12% since the start of the year, its worst
performance since it launched in 2006.
The bulk of the selling in both stocks and bonds has been
coming from wealthier and older investors, who are reducing
their overall risk exposure, mainly through the selling of
mutual funds, according to data from Vanda Research.
Bruce Bagley, 69, founder Santa Rosa Uniform & Career
Apparel in Santa Rosa, California, said he has held the course
so far in his portfolio, which is 55% stocks, 40% bonds, with
the rest in cash, even though everything but his REIT
investments have been falling.
"Where else are you going to put your money?" he said.
Investors who had large allocations to bonds, which make up
some 20% of retirement accounts on average, according to
Morningstar, have canceled vacation plans, are eating in more
often, and have reconsidered assistance to other family members,
said Melanie Nichols, a wealth advisor at WA Asset Management in
Birmingham, Alabama.
"When you have one part of a portfolio that is providing all
your income and now you see it down 10% that's frightening," she
said. "People are not used to those returns because we don’t
have those returns in the bond market very often."
Other retirees are looking for other sources of income to
try to rebuild their nest egg.
"You think you have enough to live off for years and now you
don't know if it will come back," said one 73-year old former
marketing executive in the Cleveland suburbs who had about 30%
of her portfolio in bonds and said she was considering finding
part-time work to help preserve her retirement savings.
"Clients who had larger allocations to bonds and who really
did not want to experience volatility are feeling this, and it
has been very destabilizing for those folks," said John
Cunnison, chief investment officer at Baker Boyer in Walla
Walla, Washington.
(Reporting by David Randall and John McCrank; editing by Ira
Iosebashvili, Megan Davies and David Gregorio)
((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))