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  • Chip Barnett

Gradually, Then Suddenly

July 2022

This popular description from Hemingway about the way in which a character went bankrupt is how the fall of stocks and bonds has felt this year*. In January, we were down a little, in the spring, a little more, and by the end of June stocks were down 20% and bonds 10%.

It’s rare to have such a strong move by both the stock and bond market in the same direction. Inflation is to blame. The Fed is raising rates right now to suppress inflation, but achieving their goal of 2% annual price increases won’t happen over night. High but post-peak inflation and rising interest rates could easily make for lower stocks and bonds by year end compared to today.

Markets always move faster than the data - often overshooting, by the way - leaving investors scratching their heads about whether or when to react. Anyone could be forgiven for wondering how jobs growth remains strong when GDP is about flat for the first half of 2022. According to economist Jason Furman, that hasn’t happened since 1948, implying that payrolls are about to fall or GDP is about to recover.

The bad news is not over, but I think the pace of the declines in stocks and bonds is. You can bank on the Fed using the resilient jobs market to justify further rate hikes in coming months. That is going to lead to weeks when stock and bond investors feel like selling. “Don’t fight the Fed” is the most important overhang right now in institutional investors’ heads, and means the coast is not yet clear for the bulls.

Don’t lose sight of how, at the other end of this bear market, after stocks have gone sideways for a while, “gradually, then suddenly” will also describe the recovery. Incremental investments in both stocks and bonds make sense here, because both asset classes are “on sale,” and because we invest for the long term.

Patient, diversified investment models always end up on the winning team.



* Hemingway would have written “Stocks fell.”

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