Stocks and bonds shock investors

Bond funds lost 4.2 percent on average, with long-term funds posting double-digit declines.

Marko Babic, chief strategist at Clocktower Group, asset manager, agrees with Mr. Thompson that “the more the stock market ignores the Fed’s tightening, the more likely they are to take tough action early.” But Mr. Babich expects the Fed later in the year to choose to tolerate persistent inflation in an effort to prevent a recession.

Mr. Babic advises investors to “switch to value now” by buying stockpiles from commodity producers and in countries like Brazil and Chile exporting goods. The dominance of mining in those countries’ economies could explain much of the recent strong performance that Morningstar observed among Latin American funds.

He said that if the Fed did not go ahead with an aggressive approach, inflation-adjusted bond yields “will be very low, so commodities will rise.” However, he acknowledged that pumping money into commodities is risky, adding: “If I’m wrong and there is a recession, they will kill.”

He continued that in the current environment, owning growth stocks, especially large and expensive blue-chip stocks like Microsoft and Apple, could be dangerous. They started to roll back their fortunes before the pandemic, and then Covid allowed tech companies to deliver a decade of customer growth, Mr. Babich said. “We are within this superior performance.”

The outlook for technology stocks may depend on the interest rate outlook. Tech stocks tend to respond poorly to high rates because these companies are more expensive than others to start with, and higher interest rates tend to lower the overall stock valuation. Also, higher rates often come when the economy is strong and tech companies’ ability to grow when other sectors aren’t less important.

A more aggressive Fed, even if only for a few months, means higher rates, and Mr. Brightman highlighted a trend driven by rising geopolitical risks, which could keep rates higher for longer: a “slowdown,” as he puts it, a decline or even a reversal of the system The most free trade that created enormous wealth for investors.

He said the new urgency to ensure stable and secure supply chains may force companies to shift production closer to home. Building manufacturing capacity will require capital, driving up interest rates, and because making a widget in Secaucus costs more than in Shenzhen, so does inflation.

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