JPMorgan Sees Rising Risk of Bonds, Stocks Falling in Tandem
(Bloomberg) -- Persistent inflation could trigger more spells when bonds and equities move in tandem, according to JPMorgan Chase & Co. analysts, posing a headache for investors who use fixed-income securities to shelter some of their portfolios from stock-market drops.
The bond-market selloff in September coincided with the S&P 500 shedding 4.8%, a lockstep move that battered multi-asset investors. A basket of risk-parity funds tracked by JPMorgan fell 3.6% for the month, while BlackRock’s 60/40 Target Allocation Fund had its worst month since March 2020, falling 2.5%.
That kind of pain may not be over.
In a recent note to clients, JPMorgan strategists including Nikolaos Panigirtzoglou noted that inflation surprises are likely to persist into 2022 as supply bottlenecks and commodity price rallies continue.
While a host of factors are at play behind the bond-stock relationship, one thing that links them together is the perception of growth. During the past few decades, when the sluggish economy prompted the Federal Reserve to pump out monetary stimulus, that drove up the price of both bonds and stocks.
Now the concern is that monetary policy will become a way of slowing the economy down to quell inflation fears. And rising rates will spell comparable pain for both bonds and stocks.
If bonds continue to lose their role as buffers for stock losses, risk parity funds, balanced mutual funds, and pension funds may need to look at more expensive ways of hedging equity risk, such as buying equity put options, the strategists said.
They also said the U.S. dollar is a valuable hedge given it’s deeply negative correlation with stocks --- meaning they can be trusted to move in opposite directions.
“Indeed, the dollar features prominently in our client conversations about hedges with even long-only clients mentioning the usage of long dollar overlays as a way of hedging equity downside risk,” said the strategists.
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