We are in the midst of a difficult and complex cycle. Inflation is rising and asset values are falling. We can’t know how long it will last. But it’s important to realize that difficult and complex cycles in the past have ended with the cooling of inflation and price recovery for assets. So while today’s climate does warrant awareness and caution, we can also look for opportunity on the horizon.
Almost halfway through 2022, we’ve seen significant losses in both stocks and bonds. As of May 13th, global stocks were down 16% and global bonds were down 12%. Higher interest rates, the war in Ukraine, and persistent inflation have left very few asset classes safe from the sell-off, and while bonds typically provide stability when equities are down, a benchmark 60/40 stock-bond portfolio is down over 14% year-to-date.
The Fed’s challenge to administer the correct dosage of interest rate increases to slow down inflation has proven to be a tough pill to swallow.
While some portions of the current inflationary spike may be temporary, the large increase in money supply, imbalances in supply and demand, and longer-term demographic trends suggest that a longer cycle of higher-than-normal inflationary pressures may have arrived upon our shores.