How High Will They Go?
by Matt Ahrens
I recently returned from an investment conference in New York City that was hosted by JP Morgan. The conference was timely, because there are a number of questions that we are facing regarding investments. Perhaps the most pressing question involves interest rates. The markets expect two rate increases this year from the Federal Reserve, yet many at JP Morgan are forecasting four rate hikes. The Fed did tell us that they intend to increase rates four times, but they said the same thing heading into 2016 and only found the courage to raise rates once.
We can expect some volatility over the next few months if market expectations change from two rate increases to four. Four rate hikes would mean a 1% increase in short-term rates. Given the likelihood of fiscal stimulus we feel the economy can handle higher rates. Even a 1% increase would have us below historical averages. The problem is investors with money in bonds. As we’ve said before, an increase in rates means a decrease in bond values. Most of our bond funds would be expected to drop in value between 3-5% in the event of a 1% increase. If we say the bond is providing us with 3% in interest income then our total return is flat, but it’s safe to say the bull market in bonds is over.
At Integrity Advisory, we made the decision months ago to start hedging our bond portfolios by adding floating rate bonds and inflation protected bonds (TIPS). This was a proactive decision to prepare portfolios for rising interest rates without abandoning bonds altogether. Since bonds often are a safer haven when equity markets fluctuate, we would rather maintain our investments in bonds.
What About Equities?
by Matt Ahrens
The above picture shows the Russell 2000 ETF (Ticker: IWM) from October 2016 to March 2017. The Russell 2000 tends to be a better indicator of the overall market health, because it encompasses many more companies than the Dow Jones Industrial Average or even the S&P 500. As you can see, we experienced a nice bounce after the election, but starting in early to mid-December the market started trading in a sideways range. These ranges are very usual and are normally a sign that the market is consolidating prior to moving higher or moving lower.
The recent pullback in March may just be due to concern over interest rates, and right now is nothing to be overly concerned about. It is often healthy for the market to take a breather between runs, and we certainly don’t expect market conditions to deteriorate into significant losses.
We do also have good news to report! Because the United States has been the quickest developed country to raise rates our dollar has appreciated significantly versus other currencies. This naturally led to a drop in value in international stocks, but that is likely coming to an end. Despite the likelihood that the U.S. will continue raising rates, we are seeing signs that other countries will soon follow suit. On March 8th, the Wall Street Journal reported that other countries have increased their buying of US treasuries. This will eventually lead to a devaluation of the dollar which will improve the outlook for international investments and commodities.
We may not be seeing the most opportune entry point (although that is always difficult to identify or predict), but we’re close. You can expect to see some adjustments in your portfolios in the next six months as we look to take advantage of these recent shifts.
"Every morning brings new potential, but if you dwell on the misfortunes of the day before, you tend to overlook tremendous opportunities."
"Go as far as you can see; when you get there you’ll be able to see farther."
Quotes selected by the IA staff
“Daylight Savings Time started this weekend, and I finally won the 4-month battle with my oven clock.”
Tony Moeller, CPA
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on. Also, interested individuals can contact us, and we will be happy to add them to our mailing list.