Markets Haven’t Acted Like This Since 1981, And Here’s How It Played Out

You have to go back to 1981, when stocks, bonds, inflation-protected bonds, and industrial metals all crashed simultaneously.

The S&P 500 SPX Index,
has fallen 18% this year, the iShares 7-10 Year Treasury Bond ETF IEF,
has fallen 10%, the iShares TIPS Bond ETF TIP,
has fallen by 8%, and the Invesco DB Base Metals Fund DBB,
has dropped 1%.

Then, as now, the Federal Reserve was raising interest rates to stifle inflation.

“Just like today, the world’s central banks were obsessed with ‘breaking the back’ of inflation which, like a monster in a horror movie, seemed to die before returning with a second and third wind,” says Dhaval Joshi, chief strategist. for the counterpoint of BCA Research. “Just like today, central banks were desperate to repair their badly damaged credibility in managing the economy.”

“And just like today, central bankers hoped they could steer the economy towards a ‘soft landing,’ although whether they really believed that is another story,” he added.

Joshi said the transition from stagflation to recession fears leaves investors with nowhere to hide. In April, bonds suffered the worst drop on stagflation concerns, while in May, industrial metals and stocks are falling, which are classic victims of the recession.

Going back to 1981, bond prices bottomed out first, in late summer. Stocks remained under pressure for the next few months, but 12 months later they rose. And industrial metals didn’t recapture their highs for several years.

If that’s the case now, he says, bond prices are now entering the bottoming process. Stocks would bottom next and see a faster recovery than they did 40 years ago due to their greater sensitivity to bond yields. Industrial metals, he adds, are likely to see at least double-digit losses over the next year.

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