For a decade, a falling stock market brought the Federal Reserve to the rescue. This time the Fed is the reason it is falling.
A market update from Gary Korolev on where each major asset class stands, why the usual defences are not working as expected, and what that means for portfolio positioning while conditions settle.
Where Things Stand
Equities: Liquidity Withdrawn
The S&P 500 has undergone a substantial correction and sits close to bear market territory. The proximate cause is not a collapse in earnings but the withdrawal of government liquidity, compounded by persistent fear of inflation.
The difference from previous corrections is the absence of the usual backstop. In prior years a market decline of this severity would have produced a supportive response from the Federal Reserve. That option is presently closed: with inflation at 8.3 percent, the Fed is fighting a different battle, and easing to support asset prices would undermine it.
Investors spent a decade learning that a falling market summons help. That reflex is now a liability. When the central bank's mandate points the other way, waiting for a rescue is a strategy with nothing behind it.
Bonds: The Buffer That Wasn't
Bonds are supposed to cushion a portfolio when equities fall. That relationship has held for most of the past forty years, and it is the assumption underlying the conventional balanced portfolio. This year it broke — stocks and bonds declined together.
There is, however, a change worth noting. As yields have risen, bonds have begun showing signs of stabilisation. The income now available is materially better than it was, and at some point that becomes the reason to hold them rather than an argument against.
Commodities: Where the Inflation Actually Is
Against weakness nearly everywhere else, commodities have performed well — driven by energy shortages and by the demands of the green transition, which requires enormous quantities of physical material to build out.
This connects to the diagnosis of inflation itself. The current episode is largely supply-driven: shortages of basic goods, principally energy and food. That distinction matters, because interest rates work on demand. Raising the cost of money does not produce more wheat or more refining capacity.
Too much money chasing available goods. Higher rates address this directly — borrowing becomes expensive, spending slows, prices follow.
Not enough goods to go round. Rates can suppress demand until prices fall, but they cannot create supply — which is why the cure involves more economic pain than usual.
Gold and Housing
Gold rose sharply through the COVID period and has since gone flat — a reminder that its reputation as an inflation hedge is more reliable in theory than in any particular twelve-month window.
Housing is the clearer story. Thirty-year fixed mortgage rates have risen to roughly 5.5 percent, which changes the arithmetic of affordability for every prospective buyer and, in time, for every seller.
How We're Responding
We are monitoring these conditions closely and considering a reduction in exposure to the more aggressive assets — protecting portfolios until conditions settle rather than attempting to identify the bottom in advance.
It is not a forecast about when the decline ends, and it is not an exit from the market. It is a deliberate shift in the balance between participation and protection, held until the evidence justifies changing it back.
This update reflects our views at the time of recording and is not financial advice, nor a recommendation of any security, sector, or strategy. Market conditions and positioning change. Investing involves risk, including the possible loss of principal.
How Exposed Is Your Allocation?
When the traditional stock-bond buffer stops working, the answer depends on what else the portfolio holds. We're glad to look through yours and say plainly what we see.
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