Fixed Income Fails to Mitigate Downside Risk, Sentiment and Unemployment Decouple, and Rate Hikes Are Priced In
June 30, 2022 | FIRESIDE CHARTS
As the second quarter comes to an end, it’s been an incredibly difficult year especially for investors with traditionally conservative allocations. Low unemployment has historically corresponded to strong consumer sentiment, but consumer sentiment is currently low and falling. Markets are now expecting the fastest Federal Reserve rate hike cycle since 1980. Take earnings estimates with a grain of salt, they’re usually wrong going into a recession. Mortgage rates have risen so much that there’s currently little risk of prepayments. If you invest internationally, do you know what sector bets you’re taking?
1. So far, fixed income has failed to mitigate the downside in a balanced portfolio:
Bloomberg, Federal Reserve Bank of St. Louis, Beaumont Capital Management (BCM). Data from 1/3/1962 through 6/13/2022. The 10-Year Treasury Index is a proprietary index created by BCM, please see the disclosures for calculation methodology. Past performance is not a guarantee of future results. One cannot invest directly in an index.
2. It’s always better to have a job than not, but when inflation is high just about everyone is unhappy:
Source: Deutsche Bank Research
3. The market has priced in multiple additional rate hikes, giving the Federal Reserve plenty of room to tighten further if needed:
Source: Deutsche Bank Research
4. Equity valuations may look reasonable on forward earnings estimates but buyer beware:
5. Negative convexity is when a bond’s interest rate sensitivity increases as interest rates increase, a dismal characteristic for a bond. Mortgages may be more attractive without this characteristic:
6. Investing in international countries is often a bet on the composition of sectors within the country:
Source: MRB Partners
Disclosure: The charts and infographics contained in this blog are typically based on data obtained from 3rd parties and are believed to be accurate. The commentary included is the opinion of the author and subject to change at any time. Any reference to specific securities or investments are for illustrative purposes only and are not intended as investment advice nor are they a recommendation to take any action. Individual securities mentioned may be held in client accounts. Past performance is no guarantee of future results.