US stocks plummet – is it time to buy bonds?

New York Stock Exchange, Wall St, New York, USA

(Image credit: Matteo Colombo)

Stock portfolios are feeling the “autumn chill”, says The Economist. US markets spent the first half of 2024 in a “euphoric mood”, notching up weekly gains in 28 of the 37 weeks through mid-July for their “best streak in more than three decades”. Yet a series of sell-offs that began over the summer have made for a more cautious mood on Wall Street.

The tech-focused Nasdaq Composite index dropped 5.8% last week for its worst weekly showing since 2022, while the S&P 500 finished down 4.3%. Disappointing manufacturing and jobs data triggered the latest bout of market shivers, says Kristina Hooper of Invesco. One survey showed US job openings in July were at their lowest level in three and a half years.

Still, investors should remain optimistic that a “soft landing” – where the world’s biggest economy cools without entering recession – is still possible. For one thing, while US manufacturing is struggling, surveys of the much bigger service sector remain solid. With inflation finally coming under control, long-suffering consumers will start to feel less crushed by price increases. Finally, US interest-rate cuts are imminent and “should help power a re-acceleration”.

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Time to forget US stocks and buy bonds?

Shaky stock markets are reminding investors about the attractions of bonds. Yields, which move inversely to prices, are falling. The US 10-year yield has dropped from 4.7% in April to 3.6% today, with the UK 10-year gilt yield similarly down from a peak above 4.6% last year to 3.8% now. Investors traditionally look to bonds to act as a hedge against stock volatility, says Jon Sindreu in The Wall Street Journal. While big tech shares plunged last week, a traditional American “60/40” stock and bond portfolio endured a comparatively gentle 1.9% loss.

Complex debates about whether fixed income still offers proper diversification aside, there is a simpler reason to like bonds right now: they offer decent, dependable income that investors “may want to lock in” before interest rates fall further. The great debt “shock” of winter 2022-2023 is drawing to a close, says the Bearbull column in Investors’ Chronicle. With the UK embarking on an interest rate cutting cycle, a bullish period for gilts should lie ahead.

For investors who are in or nearing retirement, an allocation to less volatile bonds may suit their lower-risk appetite better than going all in on shares. And while gilt income is taxed, UK gilts attract capital gains relief, which especially increases the appeal of gilts that are bought at a discount to their face value. Given the well-known fragility of UK government bonds, gilts’ tax exemption is unlikely to be on the Budget chopping block.

In market lore, bond investors are regarded as level-headed, while stock traders are prone to fads, says Katie Martin in the Financial Times. But over the last two years, bonds have been almost as excitable as shares, swinging from wild predictions of emergency rate cuts to deep gloom. With “signal-sniffing algorithms” playing a bigger role, a “long period of bond-market stability, verging on tedium”, is over.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.