FinTrust Research Flash: October 2018

Rising Interest Rates

Interest rates have risen significantly across the US Treasury yield curve YTD. This rise is the result of recent rate hikes by the US Federal Reserve and the increase in real (inflation adjusted) yields due to strong US economic growth. Bond  investors rarely see calendar year losses. There have only been 3 in 40+ years for the US Aggregate Index. Additionally, as a result of a culmination of several factors including higher rates, tariffs, corporate profit growth concerns, the global equity markets have experienced a dramatic uptick in volatility and a corresponding fall in the major index averages.

Current US Treasury Yield Curve

What it Means

Rising real interest rates are generally indicative of a strong economy. After the Great Financial Crisis of 2007-8, real yields on bonds went negative due to the recession and Quantitative Easing provided by global central banks. As the Fed continues policy normalization while the economy has strengthened, especially after the Trump Tax Cuts, real yields are now positive and trending higher. Normalization implies a return of volatility in both stocks and bonds.

This volatility is evident from the recent market sell-off. The S&P 500, Dow Jones and tech heavy, NASDAQ are down 6.18%, 6.43% and 7.81% from their recent highs. Much of the decline has come in the last two trading days.

Equity investors are finally realizing the impact higher interest rates will have on economic growth. The Fed raises rates to attempt to keep inflation at bay before the economy overheats.

Portfolio Action

The purpose of diversified portfolios is to cushion equity drawdowns like this week. Investors with a diversified portfolio willingly trade some of the upside provided by the stock market so that they do not experience the inevitable drawdowns Rebalancing back to target allocations and lengthening the average maturity of client bond portfolios are the recommended actions steps. This includes reducing tactical fixed income exposure and increasing investment grade fixed income exposure.

Securities offered through FinTrust Brokerage Services, LLC (Member FINRA/ SIPC) and Investment Advisory Services offered through FinTrust Capital Advisors, LLC.  Insurance services offered through FinTrust Capital Benefit Group, LLC. Any views expressed in this message are those of the individual sender, except where the message states otherwise and the sender is authorized to state them to be the views of any such entity. Trade instructions may not be accepted via email.  This material does not constitute an offer to sell, solicitation of an offer to buy, recommendation to buy or representation as the suitability or appropriateness of any security, financial product or instrument, unless explicitly stated as such in the text of the email. Past performance is not necessarily indicative of future returns. Performance numbers have not necessarily been independently reviewed or audited and therefore we make no representation as to its accuracy. Any reference to the terms of any contracts should be treated as preliminary only and subject to our formal written confirmation. This information should not be construed as legal, regulatory, tax, or accounting advice. This message (and any attached materials) is for the sole use of the intended recipient(s) and may contain information that is privileged, confidential and exempt from disclosure under applicable law.  Any review, dissemination, distribution or duplication of this communication is strictly prohibited.  If you are not the intended recipient, please contact the sender immediately by reply e-mail and destroy all copies of the original message. This is an advertisement from FinTrust Capital Advisors. 

FinTrust Capital Advisors, LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Related Posts

No results found.
You must be logged in to post a comment.