Bond Rout Encourages Investment in Equities

U.S. stock indexes have recovered from the initial shock of war in Ukraine and the havoc it has caused to commodity markets and the global supply chain.  Also, the rout in global bond markets has encouraged the view that there is little alternative to equities in the current climate.

Stocks continue to find favor with investors despite the headwinds facing equities.  High inflation is squeezing demand, and economic growth is slowing from soaring commodity prices and supply-chain turmoil.  Meanwhile, the world’s central banks are looking to end the era of highly loose monetary policies.

Corporate profits will undoubtedly take a hit from all negative headwinds, but investors are still focused on stocks because alternative investment options are scarce. Citigroup said that “with cash and bonds offering negative real yields, investors are still inclined to buy the dips in global equities, despite deteriorating fundamentals.”

The rebound in stocks in March backs up the view that investors are still pouring money into the stock market.  While the first quarter was the worst for global stock markets since the outbreak of the pandemic in 2020, global stocks recovered in March.  Apple (AAPL) had its longest winning streak in almost 20 years, and U.S. equities gained almost 10% in the second half of March.  Even with the geopolitical issues in Europe, the Euro Stoxx 50 ($STXE) recovered its initial losses suffered after Russia invaded Ukraine. 

The spike in inflation has prompted hawkishness from the world’s central banks and triggered a rout in bonds, the world’s other primary asset class.  Inflation is also eating away bank deposits, and mortgage rates are rising, leaving fewer places to allocate funds.  State Street Global Markets said, “if you are an absolute investor, you need to put money somewhere, and stocks look a lot safer than other asset classes.”