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  1. Fixed Income Channel
  2. The Divergence in Stocks and Bonds May Be Amplified
Fixed Income Channel
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The Divergence in Stocks and Bonds May Be Amplified

Ben HernandezAug 23, 2022
2022-08-23

It’s been nothing short of a heated rally for equities and bonds so far this summer, but that could change as the weather turns colder. As talks of a recession become more amplified, a divergence could occur, putting bonds ahead of stocks.

According to a Bloomberg article, a strong July for equities saw a 12% bounce, while corporate bonds were up 4.6%. A potential for a recession could lead to divergence as investors shy away from stocks and into the safety of bonds.

“It’s been a summer of love for both stocks and company bonds,” a Bloomberg article noted. “But with fall nearing, equities are set to fade while bonds strengthen as central bank tightening and recession fears take hold once again.”

“After a brutal first half, both markets were primed for a rebound,” the article added. “The spark was lit by resilient earnings and hopes that a slight cooling in rampant inflation would get the Federal Reserve to slow the pace of its rate hikes in time to avert an economic contraction.”

However, some analysts think there might be too much investor optimism. A lot of market uncertainty still remains, and the current rally could be nothing more than a bear market bounce.

“What we’ve seen at this juncture is a bear market rally and we don’t want to chase it,” said Wei Li, global chief investment strategist at BlackRock Inc. “I don’t think we’re out of the woods with one month of inflation cooling. Bets of a dovish Fed pivot are premature and earnings don’t reflect the real risk of a US recession next year.”

Get Core Bond Exposure

To get bond exposure amid turbulent times, there are a plethora of options available from Treasury bonds to investment-grade corporate options. However, for a more all-inclusive approach to getting core exposure, consider the Vanguard Total Bond Market Index Fund ETF Shares (BND A).

BND seeks the performance of the Bloomberg U.S. Aggregate Float Adjusted Index, which represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.

Bond investors can use BND as a traditional hedging component when the equities market goes awry, should a recession hit. Short-term traders can also use the ETF given its dynamic ability to be bought and sold quickly in the open market.

For more news, information, and strategy, visit the Fixed Income Channel.


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