Anyone betting the stocks they bought during the pandemic bull market would return enough to keep them ahead of inflation has reason to worry.
Not only are spiraling prices clogging up the economy and raising recession risk, they’re debasing the value of what’s left of an investor’s equity gains. Since the pre-Covid peak in February 2020, the S&P 500 has appreciated 11% a year, well above the historic average. But inflation was 5.2% over the same stretch, eating almost half the equity increase.
It’s a brutal one-two punch that gets worse in a shorter lens, with this year’s 14% drop worsened when stacked next to surging consumer prices. Adjusted for inflation, the S&P 500 is down in value at an annualized rate of roughly 40%, worse than any full year since 1974, data compiled by Bank of America Corp. show.
The data counter a popular narrative that stocks can serve as a haven during times of hot inflation. They also show the danger of following any old playbook in the post-pandemic world where the Federal Reserve embarks on an aggressive rate-hiking cycle to curb growth.
With the exception of commodities, all major financial assets have lost money in real terms over the past year, including Bitcoin, something that crypto bulls once touted as a store of value.
“We are in the worst part of the market cycle now,” Dennis DeBusschere, the founder of 22V Research, wrote in a note Monday. “Inflation/economic growth data are stubbornly firm, and markets are discounting significant tightening, but with still high uncertainty on how much MORE the Fed needs to do to slow growth/inflation.”
Since pricing pressure started to mount in April 2021, Bitcoin has lost roughly a third of its value as investors dumped risky assets in anticipation of tighter central bank policy.
Fixed income has endured deep losses too. Investment-grade bonds are down 10% in the past year, followed by a 7% drop in Treasuries and a decline of 5% in high yield. Even those meant to work as an inflation hedge are losing money, with Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP) and iShares TIPS ETF (TIP) sliding 3% and 6.7%, respectively.
Betting on stocks as a harbor during the inflation storm hasn’t worked either. The S&P 500’s 1% slide over the past year translates to a real loss of almost 10%, when the latest annualized inflation of 8.5% is factored in.
The real return is even worse for the tech-heavy Nasdaq 100 and the Russell 2000 of small-cap stocks, which are down roughly 15% and 25%, respectively.