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Inverted Yield Curve, Inflation Worries and Staying the Course

April 27, 2022
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Recently the yield curve inverted for the first time since August 2019. That means that long-term interest rates dropped below short-term rates. This is noteworthy because an inversion suggests that investors believe the near-term economy and markets are riskier than the long-term.

This phenomenon, coupled with inflation soaring above 7% have left some investors wondering, "should I adjust my investment strategy?"  While it can be tempting to worry and consider making changes, the current environment has created cause for monitoring, but not for panic. 

Yes, rising interest rates, high inflation, surging oil prices, and geopolitical tensions have all contributed to economic uncertainty. And because financial markets don’t like uncertainty, they have been performing accordingly, at heightened volatility levels. 

U.S. inflation clocked in at 7.9% for the 12 months ended February 2022 — the highest rate since December 1981. Energy prices, already on the rise, jumped even further when Russia invaded Ukraine. In response, the Federal Reserve started raising interest rates, hoping to slow the economy without triggering a recession.

Higher interest rates can be negative for the stock market, as the cost of doing business rises for companies, potentially impacting their growth rates. However, and this is important, Bloomberg data shows that in each of the last eight hiking cycles, the S&P 500 was higher a year after the first increase!

Of course, past performance is never a guarantee of future results, but the data suggests staying the course.

Fixed-income securities (bonds) are particularly sensitive to interest rate increases due to the inverse relationship between bond yields and prices. Despite increased short-term volatility, it’s important to remember the role fixed-income plays in your portfolio – diversification, preservation of capital, and the generation of income.

So in a nutshell, please follow the Henry Wealth Management mantra: "Build a portfolio you can live with, and then live with it." You also know that we live by our trademarked tagline: "The first thing we earn is trust." Thank you for letting us earn yours.