There are a lot of things in the news that can impact the economy and stock market. That includes rising interest rates by the US Federal Reserve Bank, inflation nearing 8%, soaring gas prices and the war in Ukraine, to list just a few. We are monitoring very closely these stories and how they may impact investments.
In this blog we explore the changing bond market and how rising uncertainty increases market volatility which presents challenges as we actively look for opportunities, as well as do our best to preserve wealth accumulated for our clients.
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Bonds Losing More than Stocks
Generally, when most people think of investing, they think that bonds are a safer investment than stocks; meaning that in a weak market, one would expect stocks to go down more than bonds. So far in 2022 - that has not been the case.
Both markets have seen some downturn overall: the US stock market has rallied over the past two weeks and outpaced the US bond market, which is now down more than the US stock market.
So, what is happening to cause bonds to go down more than stocks?
If you remember, the return of bonds goes inverse to interest rates. So, when interest rates are going up, then bond values are going down. The way to remember this is that existing bonds become less valuable when new bonds are issued with higher interest rates.
The US Federal Reserve raised interest rates to 0.25% on March 16, 2022. They are expected to raise interest rates as much as 2% more by the end of 2022, which will not be good for bonds. We are seeing negative returns YTD in all parts of the US bond market.
The US bond market has performed poorly this year and we think it will continue to be weak for much of 2022. We have taken the action to sell ALL “bond only” funds in client portfolios, which is the first time we have done this in our career.
Funds ready for reinvestment
These sales are ready in a money market fund and prepared for reinvestment in bond funds once the interest rates have stabilized at a new higher rate. The cash in client accounts is temporarily sitting in a money market fund and we are also continually reviewing other investment opportunities and will add when our indicators align for the buy signal.
Regarding the stock market, we took some profits and raised cash earlier in the year and added to equities in early March when the US stock market bottomed. We are continuing to keep a very close eye on the stock market and client investments.
Rising uncertainty increases market volatility which presents challenges as we actively look for opportunities, as well as do our best to preserve wealth accumulated. Be sure to contact us for a second opinion or meet with your Wealth Manager to discuss any questions you have on your investment portfolio.
Financial Journey Partners - Partners in Your Financial Journey®
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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