Even the worst markets are supposed to have havens. Some unnerved investors are wondering if this one doesn’t.
The S&P 500 is down 16%, its worst start to a year since 1970, according to Dow Jones Market Data. But assets of all kinds are also falling. Gold, typically considered a haven, has swung into the red. Bonds are typically another shelter, but this year they are falling alongside stocks, an unusual tandem that reflects investors’ uncertainty.
The risk-on cryptocurrency market, pitched for years as a counterweight to traditional stocks, is also imploding, with bitcoin losing more than a third of its value in 2022.
This sell-everything market is confounding big and small investors alike after a string of years when markets seemed to go only straight up. Now, investors are confronting red-hot inflation and the end of easy monetary policy. There is also the question of whether the U.S. is headed for a recession, which some investors fear could happen if the Federal Reserve raises interest rates too quickly.
Many traders say they are on the prowl for other investments, but even tried-and-true alternatives have lost their allure. A dash for cash—a usual strategy during turmoil—looks less appealing when inflation is hovering above 8%, chipping away at purchasing power. Investing in real estate can feel like a nonstarter when mortgage rates are rising and home prices have soared to records.
The only option, some investors say? Sitting tight.
“There’s paralysis,” said
founding partner of Brigg Macadam, a London-based investment bank. “Even as people sell, they don’t know how to reinvest it.”
Some investors are holding on to their stocks because they are betting they will eventually be rewarded, and even buying more on down days. Others are holding on because they can’t think of anything better to do.
A recent analysis from Bank of America Corp. shows outflows from stock funds have been relatively minuscule. The bank estimates that for every $100 poured into the stock market since the start of 2021, so far only $4 has been pulled out. That is based on data through Wednesday from EPFR, which tracks retail and institutional investors’ movement in exchange-traded and mutual funds.
That implies that investors still aren’t panicking. It also suggests that stocks could have farther to fall. During the Covid-19 stock-market selloff of 2020, for example, investors yanked out $61 for every $100 invested, Bank of America analysts found. During the financial crisis, it was even worse: Investors redeemed $113 for every $100 they invested.
Late last month, some 59% of individual investors said they expected stocks to fall over the next six months, according to the American Association of Individual Investors—the most bearish sentiment since the financial crisis. That same month, however, stocks made up about 70% of their portfolios, hovering around the highest levels since 2018.
Investors are wrestling with two competing desires: a safe place to park their money and a hunger for market returns.
Take money-market funds as an example. During seven of the 11 weeks since Russia invaded Ukraine, investors have pulled a net total of $186 billion out of money-market funds, according to EPFR. In the other four weeks, they voraciously poured in a net total of $132 billion.
Al Catella has stopped checking his brokerage account, figuring it is better not to know. Mr. Catella favors dividend stocks such as Chevron Corp. and Lockheed Martin Corp., which have offered positive returns this year. But, he said, that stock portfolio has also likely suffered from drops in shares of Comcast Corp. and JPMorgan Chase & Co. He would like to put more of his cash to work, but he doesn’t know where to deploy it.
“I’m a little leery about getting into the market right now,” said Mr. Catella, an 83-year-old attorney from Illinois.
In January, when stocks started falling, Mr. Catella moved more of his retirement portfolio to bonds—a move he said he now regrets given the performance of bonds this year. “They say bonds are a good protection, but it seems that they’ve never helped me much,” he said.
Individual investors aren’t the only players who are perplexed about where to shelter, especially amid expectations of more pain ahead.
“There’s still a lot of air to come out of the market,” said
a cross-asset macro strategist at Nomura Securities International Inc. “It’s a nowhere-to-hide market right now.”
head of macro at Lombard Odier Investment Managers, said his team in January began lowering its overall exposure to markets. Today, 70% of the firm’s flagship multiasset portfolio is sitting in cash. That isn’t necessarily its first choice, he said, but he is finding few alternatives. In addition to cash, he said, the flagship fund has small exposures to commodities, stocks and bonds and other trend-following strategies.
“We are looking for diversifiers,” Mr. Ielpo said, “but some diversifiers are no longer working.”
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