The Pattern: In May, the Federal Reserve raised short-term interest rates by half a percentage point, the most in a single adjustment since 2000, then raised them another three-quarters of a point on Tuesday.
In May, stock prices surprisingly rallied as long-term interest rates fell, also generating gains for bonds and bond funds.
But after a night of contemplation, the mob of day traders, rumblings of debt and inflation and Fed cynics wiped out gains and more, in bonds and equities.
That heightened fears of a prolonged, broad decline as oil prices rebound, high mortgage rates strangle the housing boom, and jobs, corporate profits and consumer spending gradually weaken.
In such a world, everyone with diversified savings and investments is in the zugzwang, the chess player’s trap where every possible move makes you worse off.
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The preventative to this is to find a safe haven. I see one year certificates of deposit paying 2%. It hadn’t been offered for a while. Take it if you’ve had your fill of turbulence.
But I don’t equate volatility with desperation. Several higher income investments, despite being in the red so far in 2022, appear oversold. Accordingly, I expect better results in the second half of the year among the main yield-oriented sectors: taxable and tax-exempt municipalities, preferred stocks, utilities, real estate investment trusts and A-rated corporate bonds. and BBB.
The few true first-half winners are also still safe. Energy investments will continue to thrive, floating rate funds remain expedient, and you can now accumulate two- to five-year Treasury bills with respectable coupons. If you are vigilant, you will be likely to buy investment grade bonds, funds and bond-like assets on declines.
After interest rates have risen the way they have, and with slowing economic growth increasingly likely, I can’t see another two quarters of 10% capital losses on short-term debt. and in the medium term. How much sense does selling more bonds make, especially since the yield curve is flattening and long-term Treasury rates stop climbing as much? A bunch of fixed-rate preferred stocks with tax-efficient dividends are nearly 20% below their $25 face value, and similarly rated issues (about BBB-minus) from financial luminaries like Allstate Insurance , Bank of America, Capital One, Morgan Stanley and US Bancorp are priced at a current yield of 6% or more.
The rare year-to-date decline in municipal bond prices followed a long period of outperformance. Now, munis dated 10 years and older are generally priced to yield more than equivalent-maturity Treasuries — a buy signal for tax exemptions, and that’s before you calculate your taxable equivalent yield, which can exceed 7%.
The war in Ukraine is a boon for national energy investments. A series of 10- to 20-year issues from oil and gas, pipeline and related industries, rated investment grade or just below, are priced at a yield of 5.5% or 6% up to at maturity, with the possibility of increasing prices. .
You get considerably more value in a number of areas today. That’s why I’m confident that this year’s balance sheet will be less daunting and perhaps more rewarding than the beginning, at least for experienced investors.