by Douglas Drabik, Fixed Income, Raymond James
In the era of abundant news media outlets and open opinions, treating turtles like thoroughbred horses can be manipulated with the pen; but, lay caution to the idea that if your thoroughbred is running the wrong direction, itās rapidly taking you far away from the finish line. Perhaps the average investor has been lulled to complacency with the idea that market influences just plod along and volatility is a submissive conception barely influencing market direction. Then all of a sudden, a major event wakes the world with visions of transformation and panic ensues triggering some investors to conclude that portfolios must be altered, tempting them to run away when perhaps they should run to bond investing.
Slow down! Although in the āmodern eraā of the last several years we are not used to many sudden or significant market jolts, letās look at the facts and remember to treat our asset allocation with long-term vision and not short-term folly. Recently at the start of every year, we are treated to the annual proclamation that interest rates will rise, the Fed will have 4-6 rate hikes, GDP will grow slowly, employment will improve, stock prices will escalate and we all enjoy the fruits of improving market data. For 90% of the year, we live with the reality that other forces have affected our annual ritual prediction. Realities like global market influences, central bank pull, dollar strength and corporate earnings impacted results and pushed us to average, steady and ordinary movements. A wild card is played, and we are ready to bet our futures on what will happen, could happen, should happen?
Most of investors are not billion dollar conglomerates with over-abundant capital, endless cash flow and a perpetual means to continue to produce income. Yet we get caught up in the excitement of media and trader hysteria and prognostications willing to sacrifice safety for ambitious desires, trading our futures as if betting on a horse race with some āinsiderā knowledge of the result. For most of us, asset allocation should not be abandoned. Growth and speculation may very well be part of our allocations where stocks, real estate, insurance products and MLPs may all play a role; but the portion of assets designed to protect some of the wealth accumulated over the years should never be treated as speculative or even growth-oriented. Individual bonds (not funds with bonds) are designed to be turtle-like, slow and steady with predictable cash flow, income and maturity dates.
Here are some facts. Granted, in a very short period of time, the markets experienced a volatile move to higher interest rates. This move is very logical given that our future president is making no secret of his intentions to invoke a vigorous fiscal plan involving spending money and cutting taxes. The fact is that the market needle has moved interest rates at most points of the yield curve to within 10 basis points of where we started the year. Hardly a significant difference and considerable shortfall to where most experts expected us to be at the start of the year. Municipal bonds may feel like the move is even greater because the short rate move has been coupled with widening spreads.
The market has baked in a lot of āfutureā happenings in a short period of time especially when considering that fiscal stimulus will likely takes years before reflecting any benefits to the economy. A December Fed rate hike is also baked in. In addition to a dramatic pre-mature reaction to future events, there are still multiple market influences which could mute a quick rise in interest rates: global interest rate disparity, demographics, dollar strength and of course the timing of implementation and success of any changes.
Do not vacate long-term strategic planning or speculate by altering asset allocation. As discussed, run-away rates have many headwinds. As a matter of fact, an extreme market āoverplayā may be presenting a great opportunity to shore-up or solidify base portfolio income at these new yield levels. New yield levels are creating exciting entry-levels that havenāt existed in some months. Now may be an opportunistic time to safely add investment-grade bonds providing improved yields created by speculative market-driven behavior.
Copyright Ā© Raymond James
