- Stocks plummeted more than 1,000 points on news of rising inflation
- The real estate market could collapse as the Fed must drive housing prices down to tame inflation
- Analysts are saying this bond bear market is the worst year in history due to inflation
Stocks in Disarray
Current events are rewriting the investment rule book. Traditionally, a well-balanced and diversified investment portfolio is like a three-legged stool. One leg represents stocks, the second one bonds, and the third leg is real estate. With inflation stuck at a 40 year high, the stool is falling apart.
Stocks had their worst day in more than two years on Tuesday. The market plummeted after the Consumer Price Index data showed that inflation increased in August. All three leading indexes suffered a drop. The Dow fell 1,276 points. The S&P 500 declined 177 points and the Nasdaq slid 632 points. For the year, the Dow is down 14.4%. The S&P 500 has lost 17.49%. And the Nasdaq plunged 25.64% into bear territory. 1
The stubborn inflation numbers made investors sell everything. The 11 sectors of the S&P and all 30 of the Dow Jones equities experienced declines. Traders fear the Fed will be forced to continue raising interest rates to bring inflation down. High interest rates will devalue stocks by damaging corporate profits. There is also a high chance that raising rates will cause a recession.
There is now talk of the Fed issuing an unprecedented 100 bps rate hike. The Fed’s own website says that they must raise interest rates above the core rate of inflation. That means the market is vastly underestimating how high rates will go. Powell has repeatedly confirmed his 2% inflation target. Recession or not, any chance of the Fed pivoting away from their aggressive plan is wishful thinking.
Savita Subramanian is the Bank of America’s Securities head. She says the S&P 500 is the “worst thing to own” in this current high inflation environment. That is, unless you are willing and able to wait 10 years. “If you’re thinking about what’s going to happen between now and let’s say the next 12 months, I don’t think the bottom is in,” she continued. 2
Real Estate and Bond Markets in Trouble
The other two investment legs, real estate and bonds, are looking wobbly as well.
Analysts worry the Fed could crash the housing market. Interest rate hikes can lead to higher mortgage rates. Which could give potential home buyers second thoughts. Housing costs are largely responsible for August’s high inflation numbers. Thus, the Fed is going to focus on forcing housing prices down.
Home sales are already slipping. Sales declined in July for the sixth month in a row. Housing starts are a measure of new home construction. They also plunged in July.
The safety of bonds is evaporating too. Analysts are saying this bond bear market is the worst year in history due to inflation. The Bloomberg Global Aggregate Bond Index down more than 20% from its peak for the first time ever. And it is only set to get worse. 3
The Fed is accelerating their ‘quantitative tightening’(QT). In other words, they are speeding up the process of unloading their balance of almost $9 trillion of Treasuries. They bought the assets to help shore up the economy during the pandemic. Now, QT is threatening the already fragile bond market. The government bond market is considered the bedrock of the global financial system. QT is removing the liquidity from it.
Bank of America has described the Treasury market strains as “arguably . . . one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004-2007.”4
These uncertain times are throwing out the traditional investment rule book. Stocks, bonds and real estate are all stumbling. However, gold remains a sturdy safe haven investment. Robert Kiyosaki is the best-selling author of the ‘Rich Dad, Poor Dad’ series. Kiyosaki says to protect your portfolios with “hard assets” like gold and silver as the “biggest crash in history” unfolds.5 To learn more how a Gold IRA can preserve your wealth, contact us today.