Higher for Longer Strategy When we look back on 2022, we cannot overestimate the damage the fixed-income markets inflicted on investors.  Investment grade corporate bonds fell 16%.  Long-term treasuries had a total return of -29%.  High yield bonds fell 11%.  Even very short-term treasuries declined 3%.  It was the worst year for fixed-income investors in roughly 40 years.  Equity markets also declined sharply.  The S&P 500 fell 18% and th..

From March of 2022 through December of 2022, the Fed raised the Fed Funds rate 4.25% (425 basis points).  Much of that was a move from a very accommodative economic stance to a less accommodative posture, but as the Fed raised rates to the point where policy was restrictive for economic growth, the market started to sober up.  Over the fourth quarter of 2022, some signs of inflation appeared to moderate, and naturally, the market thought that m..

Waiting for a Pivot Strategy The Fed has been very clear that it intends to raise rates aggressively until there are clear signs of falling inflation.  There have been 300 basis points of rate increases in the last five FOMC meetings with another 125 basis points expected before the end of the year.  The result of this has been a significant decline in the stock market, rising interest rates, and an expectation of a recession in 2023.  Monetar..

The third quarter of 2022 has been generally unpleasant for investors and the Fed alike.  The plan to allow the economy to “run hot” while the transitory nature of inflation played out caused inflation expectations to become “baked” into economic decision-making.  To combat inflation, the Fed continued its aggressive policy path of moving away from an accommodative stance to becoming restrictive.  By some measures, the combination of F..

When Will Inflation Peak? Strategy As threats from the pandemic subside, the focus has moved to the Fed and how aggressively it will fight inflation. Having raised rates three times already, with many more hikes this year expected, it seems to us the Fed is willing to risk a recession to tame inflation.  This is usually very negative for the market returns.  Both equity and fixed income markets have already seen some of the worst performance ev..

The second quarter of 2022 saw bond yields climb even further, as persistent signs of inflation climbed and it became clear that the Fed was behind in their efforts to contain inflationary pressures.  Coupled with an excruciatingly tight labor market, May’s CPI release came in at 8.6%, a 40-year high.  Moreover, the Fed seemed to have lost some credibility because according to the University of Michigan index of inflation expectations for the..

Last quarter we discussed in detail how the Fed would raise short term yields and that as the Fed walked away from bond purchases, along with technical and behavioral reasons, that there was tinder to drive broader yields higher in 2022.  We have also been operating under a theme that some of the most painful sources of inflation (food, shelter, transportation, and fuel) would be “sticky.”  It seemed as if the gravitational force of some of..

Interest Rates Spike Higher Strategy This article typically begins with a few comments about the pandemic, but cases have fallen sharply, and many more restrictions are being lifted.  We are learning to live with it on some level.  The big story from the 1 st quarter of 2022 is the sharp rise in rates.  The 2-year maturity Treasury yield increased 160 basis points.  The five-year maturity yield rose 120 basis points and the 30-year Treasury w..

Tighter Monetary Policy is Here Strategy While Covid remains the number one health threat and number one economic threat, the variants keep changing.  We were negatively impacted by the Delta variant last quarter and now we have Omicron.  While this variant is much more contagious, it seems to cause fewer serious symptoms. Some medical experts say this is how a pandemic ends; millions get infected by a much less serious variant, and we have her..

The non-transitory nature of inflation was the backbone for many aspects of life in the 4 th quarter.  Politically, it was a significant contributor to the uncertain status of the Biden administration’s signature legislative program (the social infrastructure package).  The possible addition of gas on the fire (that is the painful aspects of the current state of inflation) has moderate Democrats calling for a pause to additional fiscal stimul..

Strategy The COVID Delta variant had a significant impact on 3 rd quarter economic activity.  GDP is expected to have increased 2% - 3% in the quarter which is well below the 6.7% we saw in the 2 nd quarter.  Daily cases in the U.S. increased from 25,000 to 160,000.  Airline travel decreased, borders closed, and it seemed as though we were headed back to renewed pandemic restrictions.  August nonfarm payrolls were expected to increase 700,000..

We expected that the pandemic would be nearing the end as we moved into the last part of the year.  Covid variants, continued illnesses and “breakthrough” cases deferred our return to normal.  According to Forbes.com, the number of U.S. Covid deaths in 2021 has exceeded the number in 2020.  Forbes.com also cited that 65% of the U.S. population is at least partially vaccinated and the journal Nature, estimated that as of the end of August, ..

Strategy Unlike the first quarter when we saw interest rates rise in anticipation of stronger growth, the realization of a stronger economy has resulted in rates falling.  The 10-year Treasury yield fell by 27 basis points and long bond yields have declined by 30 basis points.  Despite commodity prices moving higher, homes selling for more than list, a waiting list to buy most major appliances, and labor costs rising, the Fed has assured us the..

The second quarter of 2021 seemed to play out exactly as planned.  Vaccinations were in the arms of nearly everyone who wanted one, causing more than the 60% of the vaccinated population to resume “life as usual,” and the stimulus dollars were being spent with vigor.  As a result of supply chain disruptions and various cashflow enhancements, there were too many dollars chasing too few goods and services, and signs of inflation were abundant..

Strategy Last quarter we wrote that an end to the pandemic may be in sight by the end of March.  I’m happy to report that more than 150 million Americans have been vaccinated.  Roughly 2-3 million people are getting vaccinated every day.   Positivity rates are falling sharply, hospitalizations for the elderly are a fraction of what they had been, and more states are allowing vaccines for the public regardless of age (over 16).   Airlines ..

“An End in Sight” Strategy The first doses of the vaccine were administered in late December.  Since there will be at least two companies with approved vaccines, and likely more than three, the most vulnerable should be protected by the end of the first quarter.  This should result in fewer fatalities and falling positivity rates.  Economic activity will increase rapidly as 12 months of isolation begins to wind down.  Scho..

Recommendations It seems a bit trivial to discuss economics and investment strategy in the middle of a pandemic.  What’s really important anyway?  Where interest rates are headed or how to remain healthy while this invisible killer terrorizes the globe?  One thing we can do is explain what we see happening in the financial markets and how can we capitalize on these disruptions.  Having lived through the 2008-2009 recession, ..

As we monitor economic activity and the impact on credit spreads, we have seen and will continue to see data that is much worse than any of us have seen before. Equity markets expect this which is why they are rallying today despite a jobless claims report that indicate an unemployment rate of 13% (the peak in ’08 – ’09 was 10%). It will probably go higher in the coming months. Fortunately, the stimulus from both th..

I want to share something important that is happening in the investment grade corporate credit market. I track the option adjusted spread (OAS) which is essentially the additional yield the investor receives versus a risk-free Treasury security. Prior to the COVID outbreak, the OAS for the investment grade corporate bond index was 102 basis points. A month later, the OAS had increased to 401 bps. It currently stands at 305 bps..

Financial Institutions Insights 1st Quarter 2020 Strategy “A Short-Term Rebound Followed by Economic Softening”   Recommendations Interest rates declined 90 basis points in 2019.  While current levels seem low (5-year Treasury note yield at 1.60%), remember in 2012 the same Treasury had a yield 0.50%.  Unless the duration of your bond portfolio is less than 3.0 years, it’s not the time to extend duration.  2020 will be a..