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Bulls Starved In August During Worst Cross-Asset Selloff Since ‘81


Investors went hungry in August, denied by Jerome Powell’s Federal Reserve of opportunities to profit like no other month in four decades.


From stocks to bonds and commodities, every major asset slid. The least-atrocious return was a 1.9% loss as shown in a Bloomberg index tracking high-yield corporate bonds. Worse was a 2.2% drop in Treasuries, a 3.9% decline in commodities and a 4.2% slide in the S&P 500.


Rarely has advice not to fight the Fed borne out more severely. The last time the best-performing asset did worse in a month was December 1981.


“The only way to make money in an absolute sense is cash or shorting something,” said James Athey, investment director at Aberdeen Asset Management. “The forward growth outlook is deteriorating. Risk assets are still nowhere near appropriately priced for such an environment and I expect weakness to continue.”


It’s a payback from the summer rally where hopes for a friendly central bank helped add roughly $4 trillion to equity and bond values in July. With Fed Chair Powell pushing back on a pivot and stressing the need to fight inflation even at the expense of growth, bulls suffocated. Rather than benefiting from a Fed put, they’re coping with policy makers who may well want risk assets to decline.


Of course, individual assets have experienced worse pain in numerous periods lately. The pullback in the S&P 500, for instance, pales in comparison with the 13% plunge it endured during the pandemic crash in March 2020. And as dreadful as things look, American assets are still viewed as a better alternative than the rest of the world, as evidenced by the dollar’s advance against a basket of currencies.


But viewed as a whole, this month was a futile one for anyone seeking shelter during the global storm.


Every market is being driven the path of Fed policy and its impact on the economy. Linkage among assets has strengthened, forcing every investor to become a macro trader. A measure of cross-asset correlation tracked by Barclays Plc sat near the highest levels of the past 17 years.


There is “no place to hide, with fears of tightening liquidity driving a surge in cross-asset correlation,” said Emmanuel Cau, head of European equity strategy at Barclays. “Tape is fragile with fluid gas situation in Europe, mixed inflation data, weaker data in all regions including China and no central banks’ put strike in sight.”


Stocks retreated in August after their best July in eight decades. The S&P 500’s failure to break above its 200-day moving average emboldened bears, but it was Powell’s remarks at the Kansas City Fed’s annual policy forum that sent equity bulls scrambling for cover. Bringing down prices “is likely to require a sustained period of below-trend growth” and an increase in unemployment, the Fed chair said.

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