By David Randall

NEW YORK, (Reuters) – Investors are moving to cash and commodities as a result of geopolitical uncertainties and concerns over a hawkish Federal Reserve.

After falling 12.5% earlier this year, the index is currently down 5% for the first quarter. The ICE (NYSE 🙂 BofA Treasury Index was down 5.6% in the last quarter, marking its worst ever start. It has been a tradition for investors to use a mixture of bonds and stocks as hedging against portfolio declines. Stocks tend to rise during economic optimism, while bonds can strengthen in times of uncertainty.

That strategy can go awry, however, and market gyrations stemming from Russia’s invasion of Ukraine, soaring commodity prices and the Fed’s hawkish tilt have combined to make it harder to follow the playbook this time around. Though a sharp bounce in stocks has more than halved the S&P 500’s losses for the year-to-date, some investors are wary the rebound may not last and are seeking to cut their exposure. Katie Nixon (chief investment officer) said, “We’re in a perfect storm right at the moment.” Northern Trust Wealth Management. “We’ve been in periods of heightened geopolitical risk before but this one feels a little different. The negative outcomes could be much more severe and broad.”

Nixon plans to increase his holdings in both energy and agricultural businesses, along with real estate investment trusts. REITs have been used in the past as an inflation hedge. According to data from BoFA Global, investors moved $13.2Billion to cash over the past week and $2.1B to gold in the same period. U.S. stocks experienced $3.1 Billion in outflows in the last nine weeks, which is their highest in that period. The firm’s latest survey showed fund managers’ cash positions earlier this month at their highest since March 2020 . George Young, a portfolio manager at Villere & Co, is raising his portfolio’s cash allocation to nearly 15%, well above the typical 3% of assets he normally holds. He said that cash is “paying literally nothing” and “is arguably negatively due to inflation”, but that he isn’t seeing the many items he wants to purchase. Recent declines have “been more painful than many prior bouts of volatility” due to the twin sell-offs in both stocks and bonds, wrote Michael Fredericks, head of income investing for BlackRock’s Multi-Asset Strategies Team, in a note Friday. He is growing more bullish on dividend-paying stocks, which trade at lower forward price to earnings valuations than the broad S&P 500, and are less sensitive to rising interest rates than growth stocks or bonds. It has been difficult to make gains in the bond market as investors rebalance their portfolios for a Fed ready to fight inflation. The 10-year benchmark U.S. Treasury yields, which are inversely related to bond prices, hit a high of 2.5% over the last week. Investors now expect more than 200 basis point of interest rate tightening in this year. [FEDWATCH]There are few opportunities to invest in U.S. bonds. Anders Persson is the head of global fixed income for Nuveen. He has increased his holdings in emerging market bonds in dollars due to the recent rally in commodities prices. He said that there is no clear playbook to help you navigate a Fed pivot after a pandemic, while simultaneously fighting for Ukraine and Russia.

As they evaluate whether the economy has the strength to withstand Fed’s aggressive rate hike trajectory, U.S. Non-farm Payroll data will be closely watched by investors. To be sure, some investors believe times of overriding pessimism are ideal for buying stocks, an idea supported by ample evidence of defensive position that has accompanied the S&P 500’s recent bounce. BoFA Global Research analysts said their contrarian Bull & Bear Indicator recently gave a “buy” signal based on outflows from equity and credit and high levels of cash in investors’ portfolios.

Janus Henderson’s global head for portfolio construction and strategy, Adam Hetts said that the greatest risk to investors is “overreacting” to short-term movements and jumping into commodities and gold as an inflation hedge. Hetts is helping clients to invest in higher quality equities that have strong cash flows, such as dividend stocks. Hetts also sees increased interest from investors in short-term hedge fund strategies. He said, “We are having an historically poor start to the year. But we’re trying not to make it worse.”