Article 3 of 5: 1st Quarter Commentary

We are in the first innings of repricing of risky, long-dated assets.

Higher interest rates and less financial liquidity is forcing “risk off” here.  Many tech stocks and, to a lesser degree, some in healthcare are down 30%-70% from their highs.  Cryptocurrencies are down.  NFT’s are down.  SPACs are down.  All of this is prior to the actual event of Fed rate increases. For now, this repricing wave is focused on speculative excesses, but expect a toll on the larger indexes as well.  

The canary in the coalmine is credit.  Mountains of debt were built at very low interest rates, with relaxed lending standards, as bond investors seeking yield enabled struggling companies to survive. As rates rise, many will be unable to refinance this debt and be forced to pay off the principal or risk default.  Some will have to restructure, and some will fail.  Investors who realize this are backing away from riskier bond sectors.  While it won’t be a straight line, this trend will continue.  The net result is bond prices are coming down and speculative investors could lose a great deal of money.   

There are better options for attractive income, like commercial real estate and structured notes.

Read the rest of this series, including tactical ideas, click here.

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