Why This Market Trend Is The “Single Biggest Risk” For Your Investments

Why This Market Trend Is The “Single Biggest Risk” For Your Investments
Andrew Rummer

over 2 years ago2 mins

Since the turn of the century, investors have benefitted from negative correlation between the prices of stocks and bonds. When stocks fell, bonds generally rallied – helping to offset losses in any portfolio that contained both. 

However, a look back further into history shows that this state of affairs has hardly been typical. In fact, as the chart above shows, for the vast majority of the past 150 years stocks and bonds have been positively correlated – rising and falling at the same time. And more and more investors are starting to worry that we might be heading back to those bad old days. 

A report this week from research firm TS Lombard points out that one of the main drivers of how stocks move in relation to bonds is the type of inflation prevalent in the economy. 

When inflation is “pro-cyclical”, it rises as economic growth accelerates. This means a pick-up in inflation – which undermines bond prices – also gives a boost to stocks as the economy grows. This is the situation that has existed in most rich countries since the early 2000s. 

However, when inflation turns “counter-cyclical”, inflation picks up even while the economy slows – often driven by supply constraints. This combination of stagnating growth and rising inflation – often known by the term “stagflation” – undermines the prices of stocks and bonds at the same time in a toxic environment for investors.

“Counter-cyclical inflation – or stagflation – is the single biggest risk for investors’ portfolios,” TS Lombard argues.

So what can you do? TS Lombard points out that gold is one of few investments that climbed during the past two major bouts of stagflation, from 1965 to 1975 and from 1975 to 1985. That said, they don’t recommend holding huge quantities of the shiny stuff and reckon that stocks – particularly cheaper “value” stocks – should continue to perform adequately. 

Overall, rather than a traditional portfolio of 60% stocks and 40% bonds, in the current environment TS Lombard recommends holding 70% stocks, 26% bonds, and 4% precious metals.

Gold provided positive returns in the last two periods of major stagflation
Gold provided positive returns in the last two periods of major stagflation
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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