Article 2 of 3: 2nd Quarter Commentary
There is an old market expression that “interest rates move mountains”.
Current dynamics are a perfect example of how true this expression is. Gravity may be the most powerful force in the universe but when it comes to financial markets, it’s interest rates. As of the date of this writing, the benchmark 10-year Treasury yield moved from 0.5% to 2.8% in 12 months. Two-year yields are up from 0.1% to 2.5%. Bonds have lost value. Stocks have lost value. The IPO market is frozen. The trailing price-to-earnings (P/E) ratio of the S&P 500 dropped from 26 to 22. And the Fed has only raised interest rates 0.25%, while it is expected to raise them a full 2% this year.
While we anticipated higher interest rates from unwinding the Fed’s balance sheet, the war in Ukraine adds more uncertainty and stress on financial markets. The effects on energy supplies, agricultural inventories, and already strained supply chains are weighing on markets. All these factors add to global inflationary pressures. Companies are currently passing their rising input costs on to consumers in the form of higher prices. That may become more challenging later in the year and certainly into next year.
We’ve also seen a worrisome leading indicator, in some inversions of the interest rate curve (when short-term rates rise above long-term rates). This is a historically accurate signal of an impending recession. However, we have yet to see the most important portion invert: the 3month/10year rate. When this happens, recession is all but assured within 2 years. As things stand today, we could see a recession sometime during 2023.
Last Fall, we shifted a percentage of client stock positions to certain real estate assets.
This is one example of how we utilize assets that reduce market exposure while still retaining upside capabilities. We also incorporated structured notes into certain client portfolios as a way to diversify risk while generating strong yields.
We will continue to make tactical shifts to our clients’ portfolios to reduce the risk of capital erosion.
Read more from the Integras Partners team in the final portion of our Q1 2022 commentary below.
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