Markets suffered a sharp loss sweep last week. It’s a rare occurrence, but it does happen, as the trading week to Friday, June 17 reminds us following all major slices of global markets posting simultaneous declines, based on a set of ETFs.
US bonds were the “best” performers thanks to a relatively moderate decline. Vanguard Total US Bond Market (BND) fell 0.8% last week. Despite outperforming other major asset classes, BND’s outlook still looks bearish, based on the fund’s weak technical profile, driven by expectations that the Federal Reserve will continue to raise interest rates ( which move inversely to bond prices). Fed funds futures currently price in a 99% chance that a second rate hike of 75 basis points is due for the July 27 FOMC meeting.
The tightening of monetary policy at a time of slowing economic growth raises fears of a recession in the United States. But in the near term, at least, expectations that the Fed will continue to raise interest rates will likely keep bonds on the defensive. At some point, investors will be looking for a pivot in market sentiment, shifting from pricing higher interest rates (i.e. lower bond prices) to heightened anxiety over the fallout from recession. In the latter case, demand for safe-haven assets, such as bonds, could rebound as worries about the macroeconomic fallout outweigh worries about rising interest rates.
Meanwhile, macro risk is an equal opportunity violator. “Our worst fears around the Fed have been confirmed: they have fallen far behind the curve and are now playing a dangerous game of catch-up,” Bank of America analysts said in a research note.
Elsewhere in the markets, there was no place to hide. The biggest loss for major asset classes last week: US equities via the Vanguard Total US Stock Market Index Fund (VTI), which closed for a third straight week, settling near its lowest close low since November 2020.
The global market index (GMI.F) also continued to fall, losing 4.6%. This unmanaged benchmark, maintained by CapitalSpectator.com, holds all major asset classes (except cash) in market value weightings through ETFs and represents a useful benchmark for portfolio strategies in their whole.
Commodities remain the only slice of the major asset classes showing a gain for the one-year period. WisdomTree Commodities (GCC) is up nearly 30% in the past 12 months, well ahead of the rest of the market.
In contrast, the biggest loser over one year in the field: foreign corporate bonds (PICB), which lost more than 20%.
GMI.F is down almost 16% for a year.
Profiling the ETFs listed above via drawdown shows that all funds are now showing relatively steep declines from peak to trough, or worse. Smallest decline at Friday’s close: -8.9% for iShares TIPS Bond (TIP). At the very end of the curve: emerging market bonds (EMLC), which suffered a drawdown of almost 30%.
Current GMI.F drawdown: -22.2%.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.