(Bloomberg) — For investors burned by inflation, a very bad year is looking even worse.
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As stock prices tumbled and bonds hit their deepest losses in years, rising consumer prices turned a few corners of the financial markets into profitable havens earlier this year. Oil prices rose. Other commodities did, too. Even rising house prices and rents boosted the real estate sector.
But the hidden places are disappearing fast.
That’s because the continued rise in core inflation — which offsets volatile food and energy prices — is poised to drive the Federal Reserve to continue its most aggressive series of interest rate hikes in years down And that’s bad for assets of all stripes.
A new study by researchers from the University of Pennsylvania and the University of Hong Kong found that stocks, bonds, commodities and real estate investment trusts are all exposed to losses when core inflation rises unexpectedly, according to data from 1963 to 2019.
“In the first half of the year when energy and food inflation were rising faster than the core, commodities did well and looked great against inflation,” said Nikolai Roussanov, professor of finance at the Wharton School at University Pennsylvania to co-. author of the study. “But when energy prices started to fall, we’ve seen that correlation and commodity futures in general aren’t doing so well.”
The change adds to the gloomy outlook in global financial markets, which have been hit hard this year as central banks around the world tighten monetary policy, marking a sharp break from the era of easy money that helped stocks and bonds thrive through the pandemic.
On Tuesday, the US Labor Department reported that the core consumer price index rose 6.3% in August from a year earlier, the first acceleration since March. The figures dashed investors’ hopes for a slowdown and confirmed expectations that the Fed will on September 21 raise its key rate by a quarter of a percentage point for the third straight time.
Such aggressive tightening raises the risk of a sharp slowdown in the economy that would affect corporate profits and demand for commodities such as oil.
The S&P 500 Index fell more than 4% on Tuesday alone, following the inflation report, and ended the week down nearly 5%. The Bloomberg commodity index has fallen 3% since Tuesday. And Treasury yields have soared, pushing US government debt to a loss of more than 11% this year, the worst since the Bloomberg index began in 1973. The US dollar is among the few bright spots , with the currency drawn up rising. interest rates.
The change in commodity markets is consistent with what has been seen since the early 1960s, according to Roussanov and his fellow researchers. While commodities return 21% when energy inflation rises by one standard deviation, they actually fall 0.1% when core inflation sees the same jump.
A similar study by researchers from hedge fund firm Man Group Plc and Duke University also found that both stocks and bonds tend to perform poorly during periods of inflation and that commodities are the only major asset class that does reliably better when inflation is high. But the caveat is that once headline inflation starts to fall from its peak, the return for the asset class is usually zero, according to one of the authors.
“The whole market and the whole world is going from this period of high and rising inflation, which we’ve been in, to a period of inflation that is still high, but lower,” said Man Group portfolio manager Teun Draaisma . “We are on the verge of that change.”
The shift is prompting a move out of commodity funds as investors prepare for slower economic growth or a recession. Widely-based commodity exchange-traded funds pulled cash for the fifth straight month in September, with nearly $17 billion withdrawn since the start of May.
“With very strong core inflation this suggests that aggressive monetary tightening will be delivered,” said Peter Chatwell, head of global macro strategies trading at Mizuho International Plc. “This should reduce demand in the short term, and take most of the asset prices lower.”
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