Rising Rates and Market Dynamics: A Glimpse into the Third Quarter
The prospect of “higher rates for longer” was top of mind for investors in the third quarter. Following the Federal Reserve’s 0.25% rate hike in late July, both equity and bond markets swooned, ending the quarter on a down note. Thankfully quarters where equity and bond markets are down simultaneously don’t occur frequently, as it can be discouraging to see one’s portfolio making less than a high-yield savings account. While rising rates are painful in the short term, we believe that ultimately higher rates will be better for bond investors and that now is a better time than it has been for the past decade to be in bonds.
Bond markets have been driven lower by investors projecting that interest rates will stay “higher for longer.” Between June 30 and September 30, the rate 10-year Treasury bonds paid (termed the yield) rose from 3.8% to 4.6%. For comparison, over the first three quarters of 2022, the same rate rose from 1.5% to 3.8%, or about three times more. Rising yields are good news for bond holders despite the short-term pain. The yield on a 10-year bond is highly predictive of the returns bond holders will make over the next 10 years and 4.6% annually is a lot more attractive than 1.5%. While yields on cash are higher right now, those can fade quickly. As one of our advisors likes to tell, there was a time in the 1980s when CDs were paying 15% and 30-year bonds were paying 9%. Then, everyone wondered why you would buy a 30-year bond when you could get 15% on cash? Fast forward 20 years to a world where rates on cash had fallen to near zero, and the investor who had locked in that 9% per year on their bonds looked like a genius. So, despite recent performance, history suggests it is a better time to hold bonds than it has been for over a decade.
Stock Market Concentration and the Tech Dominance: Navigating Today’s Investment Landscape
The same rising yields that have caused losses in the bond markets have rattled stock markets. While the recession people feared last fall shows no sign of being imminent, investors’ worries that “higher for longer” will ultimately tip the U.S. into a recession appear to have returned. The only bright spot this year has been the largest U.S. growth tech companies. Their continued dominance in the quarter has pushed the concentration of the S&P 500 index to a new high, with the top 10 stocks representing 31.9% of the index in market capitalization. On the flip side, those same companies only generate 21.9% of the earnings.1 Someday a reconciliation of that discrepancy will come, but as a famous quote often attributed to John Maynard Keynes states, “Markets can remain irrational longer than you can remain solvent.” Maybe a bit of an overstatement, but it’s also very true that trends can continue long after the data suggests they make sense.
In times like these, it is important to think about how we measure investment success. Do you know what you’re looking for in a portfolio? Meet with one of our Wealth Advisors to make sure your portfolio will be successful in helping you achiever your goals.
We also invite you to join us on Tuesday October 24th at 8:30 am Pacific time for our Quarterly Investment Update webinar where we will review what’s happening in the markets and what it might mean for Merriman’s investment strategies. Register here. If you can’t attend live, please register to receive a link to the recording you can watch at your convenience.
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.
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As Chief Operating, Investment, and Compliance Officer, Kristi is responsible for the firm’s investment offerings, client service, operations, and compliance. She and her team are focused on delivering ever greater value to our clients through outstanding service, diversified investment offerings, and easy-to-use technology.
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