(Bloomberg) – Lingering inflation could again trigger bonds and stocks to move together, according to analysts at JPMorgan Chase & Co., posing a headache for investors who use fixed income securities to protect some of their wallets from stock market crashes.
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The sell-off seen by the bond market in September coincided with the 4.8% drop in the S&P 500, a change that hit investors with diverse assets. A basket of risk parity funds tracked by JPMorgan fell 3.6% during the month, while BlackRock’s Target Allocation 60/40 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 rallies in commodity prices continue.
While a number of factors are at play behind the bond-to-equity relationship, one thing that unites them is the perception of growth. During the past few decades, when the sluggish economy prompted the Federal Reserve to introduce monetary stimulus, both the price of bonds and stocks rose.
Now the concern is that monetary policy will become a way to slow the economy to quell inflationary fears. And the rate hike will mean comparable damage to both bonds and stocks.
If bonds continue to lose their role as buffer against equity losses, hedge funds, balanced mutual funds, and pension funds may need to seek more expensive ways to hedge equity risk, such as buying options. selling stocks, strategists said.
They also said that the US dollar is a valuable hedge given its deeply negative correlation with equities, which means they can be trusted to move in opposite directions.
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