Future Bright

What happens when interest rates rise?

2021 Q2 Commentary…
Can stocks and interest rates go up at the same time? Yes, they can, and they often do. Right now, we are in a period of recovery from economic shutdowns across the globe. As companies are forced to raise prices in 2021 and meet a return in consumer demand, we are watching inflation like a hawk. Specifically, we pay very close attention to the 10-year treasury note yield as our sentiment barometer.

First, a quick education on why the 10-year treasury yield matters…
▪ Treasury securities are loans to the federal government. Maturities range from weeks to as many as 30 years.
▪ Because they are backed by the U.S. government, Treasury securities are seen as a safer investment relative to stocks.
▪ Bond prices and yields move in opposite directions—falling prices boost yields, while rising prices lower yields.
▪ The 10-year yield is used as a proxy for mortgage rates. It’s also seen as a sign of investor sentiment about the economy.

How high can the 10-year treasury yield go before we do see it adversely affect the performance of the stock market? Some economists predict it’s 3%. Others say it’s 2.5%. The truth is that their predictions don’t really matter. What matters to us is the rate of change in inflation data that typically drives the change in interest rates. If the rate of change of inflation is increasing quarter over quarter, it signals a robust recovery is afoot, assuming job growth and GDP are accelerating, as well.

When inflation becomes too large of a problem to ignore, we typically see it unfold. Take the current housing market, for example. There are hot pockets in this country where new and existing home prices have been climbing double-digits for three years running. The FOMO on low interest rates coupled with tight supply and rapidly rising prices on homebuilding materials are creating a perfect storm for a severe housing price correction, or worse yet, a crash. Translate that to the rapid rise in prices of technology stocks or “Covid-Friendly” stocks, and there is similar risk. We don’t see it in the data right now, but the risk is always present because the data can change quickly.

All signs are pointing to a strong economy in Q2. As quarterly earnings start getting released in mid-April, we’ll likely see the companies negatively affected by COVID at this time last year crush their prior years’ results. Will that recovery strength be broad enough and strong enough to fight the inflationary price wave coming? Again, we don’t know until the data shows us. What we do have to go on is the data in hand (GDP accelerating, Inflation accelerating), and we’ll continue to maintain positions we deem as favorable to own under those conditions, knowing it could turn on a dime at any time.

Future BrightWhat happens when interest rates rise?
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Using Data to Position Assets Favorably!

Q1 2021 Commentary…
2020 was a year full of alarming statistics. One you maybe didn’t hear was that over 10 million new brokerage accounts were opened by first-time investors in just the United States alone! This influx was the result of three things: stimulus checks, a pandemic-induced market selloff, and the elimination of trading commissions at brokerage firms such as Schwab, TD Ameritrade, and Robinhood.

2020 created a perfect storm to attract more individuals to invest, which is a great thing for market efficiency and liquidity. The dangerous part of this perfect storm is that many younger, new investors have not yet experienced a significant market crash, as most of this new money came into the stock market during its recovery. Significant gains were created by and for investors who were willing to take on the risk of buying assets some maybe didn’t even fully understand. New money was piling into SPACs, Bitcoin, LIDAR stocks, to name a few. (If these terms don’t ring a bell, it’s okay. We got you covered.)

In client accounts that could afford to take the risk, we benefited from the irrational exuberance of many of these first-time investors. In fact, we rode some of the waves they created. However, we know the tide can go out just as fast as it comes in, and as asset managers, we have to have a game plan in place for when markets aren’t turning up all roses. Discipline is often what marks the difference between casual, DIY investors and those of us who do this for a living in times like these.

If 2020 taught us anything at Future Bright, it’s that we have to pay attention to the raw economic data more than ever before. We’re not talking COVID numbers. We’re talking economic numbers. Specifically – GDP and Inflation – which are the two most telling indicators of what lies ahead for financial markets.

Currently, we’re in a “GDP up, Inflation up” environment. Certain investments work better than others under these economic directional conditions, and it’s our job to find them for you. It’s also critical to recognize these economic directional conditions will periodically shift. That’s just how economies ebb and flow. They endure four cycles: Prosperity, Reflation, Stagflation, and Deflation. If we know the current economic directional condition and can also see when that condition is changing, we can use data to position assets favorably under any condition.

Ironically, asset management in 2021 will be much more challenging than it was in 2020. We expect to see greater market volatility this year. (Honestly, we thought volatility would come in Q4 of 2020, but it never did.) Nonetheless, it is also a very exciting time to be an investor. The public policy response driven by COVID has actually accelerated many new market opportunities in technology, energy, healthcare, e-commerce, and other industries. As always, there will be winners and losers in the markets, but there are some great opportunities for wealth creation ahead borne out of both volatility and emerging investment opportunities.

Future BrightUsing Data to Position Assets Favorably!
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Goodbye to “2020”

Phew! We soon will be able to put 2020 behind us. The financial markets have been just as abnormal as most other facets of our lives this year. All the relevant U.S. stock indices endured the fastest bear market declines in history…just 16 days! It was swift and severe, yet short-lived, as the markets repaired most of the damage in the form of a V-shape pattern despite most Wall Street “experts” predicting an L-shaped recovery.

Future BrightGoodbye to “2020”
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