Why This Bear Market Is Bad for Stocks and Bonds

A global bear market in financial assets has been raging for months and shows few signs of abating. The MSCI global stock index has lost about 22% from its high last autumn. Emerging-market stocks have lost about 30% since their high early last year. But most striking is how badly other assets have done at the same time, notably government and corporate bonds. Indexes of seven-to-10-year US Treasuries and investment-grade corporate debt have lost about 10% and 13% respectively this year. That’s still much better than the lamentable performance of their European counterparts. Yet it is highly unusual for both fixed income and equities to perform so badly at the same time. Since the late 1990s, stocks and bonds have been negatively correlated: If stocks tumbled, bonds tended to go up. What happened?

In February 2021, I wrote that the Federal Reserve had created the biggest financial bubble in history because it encompassed everything. Growing inflationary pressures, I argued, would pop that bubble as the Fed and other central banks would be forced to act. What I should have also pointed out was that the overall valuation of most traditional securities portfolios, which contain a selection of bonds and equities, was without a doubt far and away the highest it had been in history. Those valuations were driven ever higher by central banks’ reaction to the previous two decades of disinflation and their extraordinary and ill-timed reaction to the Covid pandemic.