Illustration by Melanie Lambrick
Illustration by Melanie Lambrick

Why the Asset Bubble Popped, All at Once

Wealthsimple makes powerful financial tools to help you grow and manage your money. Learn more

It’s the morning after in North America. The major stock indices finished the third quarter at or near bear territory, and bonds have provided no port in the storm: Bloomberg’s benchmark U.S. Treasury index shed 4.3% in Q3, bringing its year-to-date losses to a historically awful 13%. (Canadian Treasury bills finished the quarter flat.) This one-two punch has dealt so-called 60/40 investors — those who hold that classic portfolio allocation of stocks offset by (ostensibly) safer bonds — their worst annual showing since the Great Depression. Which has a lot of reasonable people wondering: why has this diversified, resilient portfolio failed to be, well, resilient?

TLDR Newsletter Logo

Sign up for our weekly non-boring newsletter about money, markets, and more.

By providing your email, you are consenting to receive communications from Wealthsimple Media Inc. Visit our Privacy Policy for more info, or contact us at privacy@wealthsimple.com or 80 Spadina Ave., Toronto, ON.

Recommended for you

  • Cubicle Escape Plan: How to Semi-Retire Years Before Most Canadians

    Finance for Humans

  • Credit: Cari Vander Yacht

    OMG You’re Having a Baby! (A Guide to That and Other Big Life Moments That’ll Affect Your Taxes)

    Finance for Humans

  • A book that says shit no one knows, tax edition

    Five Tax Enigmas That Confuse Basically Everyone

    Finance for Humans

  • How Do I Diversify, Anyway?

    Finance for Humans

The Easy-Money Era Is Over Markets are, in effect, enduring a bruising hangover from a long-standing stimulus party. In the years after the 2008 meltdown, central bankers kept interest rates near zero to encourage lending and jump-start the economy. These low rates gave investors little reason to keep money in the bank, since zero rates meant zero interest payments. Cash was trash. Growth trumped profitability. Savers suffered, while borrowers basked in cheap money and low credit stress.

The result was a decade-long bonds-and-stocks frenzy that, in time, fomented a giant asset bubble — one that grew during the pandemic. Last year, by one measure, stocks reached their most expensive levels, relative to earnings, since the dot-com days. Demand for bonds, meanwhile, was so strong that a record $18 trillion of global debt slipped into the Upside Down, meaning that investors, desperate to put their money anywhere but in the bank, were willing to pay more for a bond than what they would receive when it matured. Buy $100 now; get back $95 in five years. But the thinking went that maybe the bond prices would appreciate with a little luck.

Higher rates have crushed stocks that soared during the zero-rate era, particularly those of fast-growing, unprofitable tech companies.

Interest Rates Triggered a Reckoning Now, raging inflation has forced central bankers to sharply raise interest rates to slow the economy. These higher rates have crushed stocks that soared during the zero-rate era, particularly those of fast-growing, unprofitable tech companies, like Shopify (down a cool 80% this year) or DoorDash (-70% YTD). Meanwhile, bonds, which have historically risen when stocks slide, haven’t dampened the blow, since rising rates pushed investors to hoard cash in (now juicy) savings and money-market accounts.

Could Q4 … Be Worse? As markets limp toward the 2022 finish line, one big question is whether policymakers will throttle back their rate-hiking campaign to control inflation. The U.N. has already called on central bankers to halt rate hikes to avoid a global recession. And high borrowing costs will constrain government spending, perhaps testing policymakers’ inflation-curbing resolve. So far, though, neither the Fed nor the Bank of Canada have signalled an end to the hikes and likely won’t in the very near future, following another hot U.S. inflation print last week. There’s a chance that inflation could start falling fast late this year or early next, as rising rates take their toll. But, provided prices stay stubbornly high, legendary investor Stanley Druckenmiller speculated on where this leaves us: “All those factors that cause a bull market, they’re not only stopping; they’re reversing.” This quarter, in other words, could be even more sobering than the last one.

Philip Grant is the associate publisher of Grant’s Interest Rate Observer, a financial newsletter that, among its many distinctions, was one of the first publications to warn about the 2008 financial crisis.

The content on this site is produced by Wealthsimple Media Inc. and is for informational purposes only. The content is not intended to be investment advice or any other kind of professional advice. Before taking any action based on this content you should consult a professional. We do not endorse any third parties referenced on this site. When you invest, your money is at risk and it is possible that you may lose some or all of your investment. Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only.

Money Diaries

"MY UNDERGRADUATE ADVISER TOLD ME I SHOULD JUST FORGET ABOUT THE WHOLE WRITING THING. ‘YOU SHOULD FIND A GOOD MAN AND GET MARRIED,’ HE TOLD ME."

Margaret Atwood

TLDR Newsletter

Business news made simple

Sign up for our weekly non-boring newsletter about money, markets, and more.

By providing your email, you are consenting to receive communications from Wealthsimple Media Inc. Visit our Privacy Policy for more info, or contact us at privacy@wealthsimple.com or 80 Spadina Ave., Toronto, ON.

  • It might seem like this is a crazy year to start doing your own taxes. But, for most people, it’s actually the perfect time. To illustrate how easy-breezy it is, we made this quick guide to using Wealthsimple Tax.

    Finance for Humans

    Is This the Year to Try Wealthsimple Tax? (Um, Probably. Yes)

    It might seem like this is a crazy year to start doing your own taxes. But, for most people, it’s actually the perfect time. To illustrate how easy-breezy it is, we made this quick guide to using Wealthsimple Tax.

  • And six other things you need to know to do this tax season right.

    Finance for Humans

    You May (Still) Have to Pay Taxes on COVID-19 Benefits

    And six other things you need to know to do this tax season right.

  • Wealthsimple

    Grow your money

    Smart investing tools and personalized advice designed to build long term wealth.

  • Finance for Humans

    What You Really Need to Know About IPOs

    The tidal wave of hype that comes with every initial public offering may spark your investing FOMO. But FOMO isn’t the best strategy. Here’s what you’ll want to understand before you jump in.

  • Finance for Humans

    Learn to Speak Crypto: Lesson One

    In our first installment, we’ll learn five terms that’ll help you understand not just the weird words the crypto-literate are using, but also crypto itself.

Wealthsimple

Grow your money

Smart investing tools and personalized advice designed to build long term wealth.

Get startedright arrow icon