What’s Going On in the Markets?

It may be time to diversify – if that was not already the name of your game.

When is the last time that BONDS, no less the 10-year Treasury and TIPS, were the information we sought to read before we checked TSLA and AAPL??

Yes, when stock markets get rocky it is wise to look to the bond market, interest rates and the Fed for answers. Here is a less than 2-minute primer on several terms that matter. Oh, and my bond expert and bond trader friends will smile at the following statement: Everyone knows the “bond gals and guys” are smarter than the “equity gals and guys.” (PS. I started out as an equity gal.)

When stock markets get rocky it is wise to look to the bond market, interest rates and the Fed for answers.

Terms that matter today:

  • Inflation
  • Inflation expectations
  • 10-year US Treasury yields
  • “Real” 10-year US Treasury yields
  • Economic growth expectations
  • The Fed’s benchmark interest rate
  • The Fed’s guidance on its benchmark interest rate

There is much, much more to say on these topics. In short and for starters,

  1. While still very low, interest rates have recently risen substantially.
  2. The actual rate of inflation today is different than expectations of future inflation.

Already today, there is more inflation than there was last year. For example, prices for gas, energy and lumber are much higher. And as discussed in last week’s edition of TGIF 2 Minutes prices for most of the things we want have already and will continue to go up in the immediate future. Although apparel and certain types of medical care prices have dropped most recently.

BUT – expectations vary widely among “experts” of how fast prices will continue to rise. Therefore, since inflation is a bad thing (for bonds specifically) bond traders have begun to sell bonds thus causing interest rates to rise. Remember, bond prices move directly opposite of interest rates.

This, in turn, has led equity traders and active equity fund managers to read into the rising interest rate environment that, at least in the short-term, it makes sense to own slightly less of certain stocks and sectors including high-flying technology and growth stocks.

Are you confused yet? I promised a not-too-deep dive into the bond market. Leave it to say that the immediate future is uncertain for interest rates, inflation, expected inflation, economic growth, and the Fed’s longer-term stance on interest rates. It is time (as it has been for decades) for portfolios to be well-diversified. How diversified? It differs by client. Plus, weekends are far more enjoyable without worries of GameStop, TSLA, and which sector will next be affected by inflation, interest rates, the Fed and fiscal policy.

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