Time to Hedge Against Loss
The old Wall Street adage of “Sell in May and Go Away” is especially apropos this year with the Fed under the gun to aggressively hike rates to fight inflation. They are hiking rates and turning from the largest buyer of bonds to the largest seller as they collapse their balance sheet of mortgage, corporate, and treasury bonds. When there is more supply than demand in the bond market, it puts more pressure on interest rates. This situation will turn out to be a “double whammy,” causing interest rates to spike, as we have already witnessed, with mortgage rates almost doubling over the past few months.
The second-largest economy globally, China, is in lockdown, which automatically causes its economy to slow dramatically and puts recession pressure on the global economy. Europe is struggling with the fallout of rising inflation and a shift in monetary policy, and “Putin’s War.” Sanctions on Russia are a double-edged sword that will curtail Russia’s economy and raise the price of energy and commodities globally, stoking inflation even more.
Positive Returns in Equities or Bonds Seems Unlikely
Positive equity or bond returns become exceedingly unlikely until these impediments to economic stability and growth recede. Q1 was one of the worst performance starts in a year in recent history. We think Q2 could be far worse. Yet we can imagine that over the next 6-12 months, a number of these negative trends could turn on a dime, which would cause the market to skyrocket. First, the Fed is likely to raise rates too quickly to curtail inflation putting the economy and market into a tailspin. If they do, they will move from tightening to accommodation to limit the damage. We have seen this before, most recently in 2018 and in 2020. Second, China will likely be successful in limiting its Covid pandemic risk and will reverse course by reopening and aggressively trying to prime their economy with stimulus. Third, the war in Ukraine could reach an inflection point causing parties to agree to end the conflict, which would lift pressure on Europe’s economy and prevent further disruptive sanction policies from being implemented.
De-risk Portfolios Now
If the market does snapback with another melt-up like 2021, you need to protect capital with a rational strategy to limit the amount of downside loss you incur. By protecting capital from significant losses, you can improve your long-term performance dramatically. So it’s time to look to your hole card and de-risk your portfolio before the market slips on a provable banana peel. There’s no need to “sell in May and go away” if you hedge by de-risking your portfolio. WBI has a variety of offerings that may help you potentially limit loss while being in a position for the next great bull market rally. From active to passive, we have a capital protection approach that can help you prevent from having to make a bail and fail decision that might do irreparable financial harm.