US economy

Investors Have Nowhere to Hide as Stocks, Bonds and Commodities All Tumble


Stocks? Messy. Bonds? Meh. Commodities? Not pretty.

Most years, financial markets are a mixed bag. A bad year for risky investments, like stocks, might be a great one for safe bets like government bonds. Or, if worries about inflation are hurting bond investments, commodities like gold tend to do well.

Not this year.

For the first time in decades, every major type of investment has fared poorly, as the outlook for economic growth and corporate profits is dampened by rising trade tensions and interest rates. Stocks around the world are getting pummeled, while commodities and bonds are tumbling — all of which have left investors with few places to put their money.

If this persists, or grows worse, it could create a damaging feedback loop, with doubts about the economy hurting the markets, and trouble in the markets undermining growth.

Pessimism emanating from the stock market could leave consumers and businesses scared to spend. The rout in junk bonds makes it more expensive for financially fragile businesses to borrow. The collapse in crude oil prices discourages new investment and hiring in the oil patch, which has been a source of job growth.

In that sense, the markets are both a gauge of what investors expect to happen in the economy, and a potential catalyst for their decisions. The mood in the financial markets ultimately feeds into spending by companies and consumers, and if they pull back, based on panicky ups and downs, growth could suffer.

“People look to the financial markets as a source of information, as a signal, about what’s going to happen and what’s going to come,” said Itay Goldstein, finance professor at the Wharton School at the University of Pennsylvania. “And when they see markets going down, they start thinking pessimistically about the outlook for the real economy.”

[Read more: Stocks across Wall Street are enduring one of the most prolonged periods of volatility of the past decade.]

There’s scant evidence that the worst-case scenario will play out. The American economy remains strong: Unemployment is near 50-year lows, and growth is steady. And it wasn’t that long ago that financial markets were feeling good about the global economy, shrugging off troublesome issues like the trade war, Britain’s exit from the European Union and the debt levels of developing nations.

On Sept. 20, stock investors in the United States were sitting on a nearly 10 percent gain for the year. Benchmark American crude oil prices were up more than 20 percent. The tech-heavy Nasdaq composite index was up more than 15 percent.

But those profits are gone.

Since October, an index of commodities that includes oil and copper has swung from gains of 20 percent to losses for the year. A similar move took place in risky corporate bonds. So far this year, after another steep drop on Friday, the S&P 500-stock index is down about 2.8 percent.

[Read more: The stock market has wiped out its 2018 gains. There have been several moments like this in the last decade.]

“In a typical year there’s going to be some winners and losers,” said Ed Clissold, chief United States strategist at the equity market research firm Ned Davis Research. “It’s very rare that you get nothing working.”

His firm recently looked at eight types of investments going back to 1972. In every year, at least one of these categories generated a return of 5 percent or more. A separate study by JPMorgan Chase analysts found that “2018 has delivered losses on almost every asset class and investing style.”

The widespread market jitters have accompanied a tectonic shift in the investing world, as central banks have begun to withdraw the extraordinary support provided to the global economy in response to the financial crisis a decade ago.

For nearly seven years, the Federal Reserve kept interest rates near zero and bought trillions of dollars’ worth of government bonds, which pushed interest rates — that move in the opposite direction of prices — sharply lower. Money in the bank earned next to nothing, so investors eagerly bought anything they expected to generate some kind of return: risky debt, real estate, stocks, technology start-ups.

The Fed’s support, bolstered by similar efforts from the Bank of Japan and the European Central Bank, proved to be a huge tailwind for global financial markets. Everything seemingly moved up in tandem.

Now the opposite appears to be unfolding, as the Fed pull backs. The American central bank has raised interest rates eight times since December 2015, and is expected to do so again this coming week. This year alone, it has shrunk its stockpile of bonds by roughly $370 billion. On Thursday, the European Central Bank said it was ending its crisis intervention, called quantitative easing.

“What was once a tailwind is now a headwind for markets,” said Dan Ivascyn, group chief investment officer at Pimco, a bond investment firm with $1.7 trillion under management, in Newport Beach, Calif.

At least on the margins, the turmoil in the financial markets is already reverberating in the real economy.

For instance, as Treasury bond prices have declined this year, interest rates — which move in the opposite direction — have risen.

Those Treasury yields serve as the basis for a range of consumer borrowing rates, such as on mortgages. With the 30-year fixed mortgage rate rising above 5 percent this year, activity in the housing market has slumped, sending the stock prices of homebuilders sharply lower. The S&P 1500 index of home building stocks is down more than 30 percent this year.

In recent weeks, the broad investment declines have worsened while anxiety grows over the trade war between the United States and China. This fight, between the world’s two largest economies, may already be dragging on global growth.

Economic data this month showed that Chinese trade slowed sharply in November, with imports of key metals such as copper and iron ore declining from the same month last year. On Friday, Chinese officials reported weak growth in monthly retail sales and industrial production. The numbers point to a deepening slowdown for the industrial heart of the world’s No. 2 economy. Weak demand from China has roiled commodities, which are on track for their worst year since 2015.

The experience of 2015 could be a useful road map for investors. That year was uncomfortable as the Federal Reserve planned to raise interest rates against a backdrop of soft global growth. Stocks, corporate bonds and commodities all fell, while Treasury bonds eked out a minuscule gain.

In the midst of the market turmoil, the Federal Reserve slowed down the pace of its interest rate increases. And the pause from the central bank reinvigorated risk-taking among investors, with the S&P 500 rising 9.5 percent the next year, and the economy continuing to grow.

That’s all to say, investors can be quick to jump to conclusions. But they can also be wrong.

“They’re like people reading a book,” said Jurrien Timmer, director of global macro at the asset manager Fidelity Investments in Boston. “But they’re going to skip five chapters to see how the book ends.”



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