Updated: Jul 17, 2022
The recent market volatility has naturally made some investors uncomfortable. As we know, the current environment is a cause for monitoring, not a cause for panic.
Inverted Yield Curve + Inflation = Stay the Course
Recently the yield curve inverted for the first time since August 2019 (which means that long-term interest rates have dropped below short-term rates).
Why do we pay attention to this?
Because this inversion suggests that a lot of investors believe the near-term economy and markets are riskier than the long-term.
This recent inversion in the yield curve and inflation soaring above 7% have left some investors wondering whether to adjust their investment strategy. While it can be tempting to worry and want to rush and make changes, the current environment is cause for monitoring, not cause for panic.
Yes, rising interest rates, high inflation, surging oil prices, and geopolitical tensions have all contributed to economic uncertainty. And because financial markets don't like uncertainty, they have been performing accordingly.
U.S. inflation clocked in at 7.9% for the 12 months ended February 2022 — the highest rate since December 1981. Energy prices, already on the rise, jumped when Russia invaded Ukraine. In response, the Federal Reserve started raising interest rates, hoping to slow the economy without triggering a recession.
Higher interest rates can be negative for the stock market as the cost of doing business rises for companies, potentially impacting their growth rates. However, Bloomberg data shows that the S&P 500 was higher a year after the first increase in each of the last eight hiking cycles. Of course, past performance is never a guarantee of future results, but the data suggest staying the course.
If you have conservative portfolios
Fixed-income securities are susceptible to interest rate increases due to the inverse relationship between bond yields and prices. Despite increased short-term volatility, it's crucial to remember fixed income's role in your portfolio – diversification, capital preservation, and guaranteed income.
So, in a nutshell, stay the course.
We're here to help you navigate these choppy waters and keep you on track to meet your goals. Rest assured, we will continue monitoring your investments and making adjustments if necessary.
We are just a phone call or email away if you have questions.
Talk to you soon,