2022 has been an unusual year in the global economy. One of the strangest phenomena we’ve seen this year is a simultaneous selloff in both stocks and bonds as investors struggle to find safe places to put their money. Here’s what you should know about the relationship between stocks and bonds and why both have plummeted in 2022.
Under ordinary circumstances, bonds (a type of fixed-income security) and stocks have . When interest rates are high enough to compete with anticipated stock market returns, bonds can be more attractive than stocks due to their relatively low-risk levels. Investors also tend to sell stocks and flock toward bonds when the stock market is perceived as an extremely risky place to put money.
It’s worth noting, however, that this correlation is not always very strong. In many instances, external factors make stocks and bonds move in tandem. While interest rates and stock market volatility can both push investors toward bonds, it is not inevitable that falling stock prices will lead to rising bond prices.
Today, the stock market is clearly in a . Rising interest rates, the war in Ukraine, global supply chain difficulties, a slowing Chinese economy, and have put pressure on the stock market. As such, one might expect to see bond prices rise as investors pull out of stocks and look for other places to invest their money.
Contrary to this conventional wisdom, however, the bond market has seen its worst selloff since 1949. This is largely because of the aggressive interest rate hikes central banks around the world have introduced. These rate hikes have driven up bond yields. When yields rise, the prices of bonds fall proportionately. As such, the actions of central banks have led directly to lower bond prices.
This, of course, feeds into a vicious cycle for investors. The inflation that central banks attempt to stifle has put pressure on corporate earnings, pushing stocks lower. Higher interest rates, on the other hand, push down bond prices. Until inflation is dealt with and interest rates reach a point of equilibrium, investors will likely continue to see stocks and bonds move together.
Other investments are also defying historical trends, highlighting just how unique the current economic circumstances really are. Gold, for instance, is widely seen as a hedge against inflation. As such, investors would typically expect to see the precious metal rise when inflation reaches the levels we’ve seen in 2022. So far, though, gold has remained relatively stable due to the dollar gaining strength this year.
With all this said, bonds are still appealing for low-risk fixed income. For this reason, it’s usually best to allocate a higher percentage of your assets to bonds as you get older. The closer you get to retirement age, the more you’ll need stable, of regular income. Even though prices can decrease when yields go up, bonds are still an extremely safe investment in your portfolio.
It’s also important to remember that short-term market fluctuations for any asset class shouldn’t dictate the composition of your portfolio. Recessions, , and selloffs are all bound to happen during your investing lifetime. The key to success is to focus on a long-term strategy that uses diversification and dollar-cost averaging to keep your risk level under control, ride out the short-term volatility, and benefit from the market’s growth over time .
One of the simplest ways to invest with these strategies is to invest regularly using a high-quality robo-advisor like SmartWealth by NBK Capital. SmartWealth’s investment plans utilize multiple asset classes that tend to perform differently, to diversify your investments and mitigate risk. With this simple approach, you can invest for the long term and worry less about temporary economic ups and downs.
