Even as U.S. stocks flirt with records, investors are staring at a cross-asset landscape that hasn’t been painted with this much red since the depths of the financial crisis.
The dollar’s upswing, brewing price pressures and cracks in the synchronized growth story have pushed asset returns into negative territory across much of the world.
This year is on track to deliver the lowest share of positive returns adjusted for inflation across 17 major asset classes since 2008, according to Morgan Stanley.
Real yields are on the verge of breaking into a higher post-crisis range, threatening more damage to besieged portfolios.
Only the Russell 2000, S&P 500 and U.S. high-yield bonds -- some of the most expensive asset classes around -- have provided unhedged investors shelter from the storm in dollar terms.
“There always seems to be a level of griping, on both the buy- and sell-side, that conditions are challenging for one reason or another,” Morgan Stanley strategists led by Andrew Sheets wrote in a report on Sunday. “But this year it really seems to be the case.”
The Federal Reserve is poised to usher in a new era of real policy rates when it makes its forecast interest-rate increase this week -- turbo-charging the competition for capital and testing asset valuations anew. Longer-term inflation-protected Treasury yields hit their highest since 2011 on Tuesday. Real rates play a key role in discounting projected corporate earnings.
The investment landscape marks a volte-face from 2017’s Goldilocks regime, characterized by subdued inflation, a synchronized global upswing and a clamor for yield that pushed emerging-market assets higher.
Rising short-term rates adjusted for inflation are now allowing portfolio managers to satisfy their craving for yield lower down the risk spectrum, while increases at the long-end challenge equity valuations.
“We’re big believers that real rates matter most for risk markets, as it’s the rate over and above inflation that matters most for discounting future cash flows,” the bank’s strategists write. “As ‘invincible’ as the U.S. equity market has been, it hasn’t had to confront a different rate regime.”