BofA Global Research stated in a note on Friday that investors with traditional “60/40” portfolios are facing the poorest returns this year in a century. Also, bond markets are still experiencing massive withdrawals.
In its weekly “Flows Show” report, BofA stated that “inflation shock ain’t done” and that “2022 (is) a simple tale of “inflation shock” creating “rates shock” which in turn threatened “recession shock” & “credit event”
In 2022, valuations across asset classes will have fallen due to soaring inflation, rising interest rates, the European war, and a severe energy shortage.
However, the S&P 500 index of stocks is down almost 23% this year and has lost 15% just since the middle of August.
On Thursday, statistics revealed that U.S. consumer prices rose more quickly than anticipated in September, shattering hopes that inflation may be slowing down. This report confirmed forecasts that the Federal Reserve will raise interest rates by another 75 basis points next month.
Furthermore, using information from EPFR, BofA reported that investors have been selling bonds for eight weeks in a row while European stock funds have had outflows for 35 weeks in a row.
Typical holdings in so-called “60/40” portfolios consist of 40% of fixed income and 60% of stocks.
According to BofA, annualized returns on portfolios like this have fallen by 11.9%, which is the lowest performance since 2008. This is in contrast to “25/25/25/25” portfolios, which hold equal amounts of cash, commodities, equities, and bonds.
Moreover, during the week ending on Wednesday, equity funds had inflows of $0.3 billion while bonds experienced significant losses of $9.8 billion.
Investors sold financials for the sixth week in a row, infrastructure was sold for the first time in 11 weeks, and bank loans were sold for the 18th week, according to BofA.
For the fourth week in a row, BofA’s bull & bear indicator is still at its “max bearish” level.
The expectation that inflation will decline and the fact that in 2023 inflation will be expected rather than unexpected are both positive developments, according to BofA.
