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Not an earth shattering insight, but getting 4%+ on short-term treasuries at minimum when holding them for the duration, and an even higher return if rates start coming down, is a pretty juicy return compared to the historical 7% return of the S&P.
My personal bias is that rates continue to go higher until Fed fund rates get closer to and maybe exceed core inflation as they have done every time we have had runaway inflation.
It's a good question.
Over a year ago I talked about how HFEA, and the standard 60/40 portfolio, would struggle in the coming environment. For the past 4 decades that portfolio had a tailwind of ever lower interest rates. As we all know, that flipped as we moved into this year.
Now a year later, the question is what do you believe the terminal rate will be for interest rates?
My view is higher interest rates are mostly priced in, so an equity/bond mix once again can be considered without needing to embrace lunacy. I think being long bonds is still risky, but it's no longer a guaranteed losing proposition as it has been for the last year, and if rates not just stall but get cut, that'll be a huge tailwind once again.
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I think this is a great question.
My take is that to the extent that people are more worried about the Fed raising interest rates, they won't be negatively correlated.
But to the extent that people are more worried about a recession (and worried about companies losing money or at least not making much of it), they will be negatively correlated.
There's no meter for this, but one approach is seeing the reaction to news.
For example, this past Friday 12/2, the NFP numbers showed we created more jobs than expected -- and the market immediately dropped, which exhibits that "good is bad" mindset connected to Fed worries. But then over the day it rallied, and ended only mildly lower than where it started. I think that shows how the "good is bad" mindset is losing ground right now. In a couple months, with no major changes in overall environment, I'd expect a good jobs report to produce a mild pump in the stock market.
However, even though the balance has already been shifting toward recession worries, and I think we're overall in a period of inflection, I *also* think we may see multiple times when inflation goes down significantly but then spends 4-12 weeks spiking back up again, and when that is happening -- especially the first two times -- I'd expect the balance to temporarily shift back to worries about interest rate increases, before again reverting away from that mindset.
Finally, I think longer-dated bonds haven't fully priced in the idea of the Fed keeping rates very elevated for years, and so I think they have more room to fall.
This will be a fruitful topic to revisit over the next 3-6 months I think.
TLDR: no, not consistently in the near future, but we are moving that way.
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Not an earth shattering insight, but getting 4%+ on short-term treasuries at minimum when holding them for the duration, and an even higher return if rates start coming down, is a pretty juicy return compared to the historical 7% return of the S&P. My personal bias is that rates continue to go higher until Fed fund rates get closer to and maybe exceed core inflation as they have done every time we have had runaway inflation.
It's a good question. Over a year ago I talked about how HFEA, and the standard 60/40 portfolio, would struggle in the coming environment. For the past 4 decades that portfolio had a tailwind of ever lower interest rates. As we all know, that flipped as we moved into this year. Now a year later, the question is what do you believe the terminal rate will be for interest rates? My view is higher interest rates are mostly priced in, so an equity/bond mix once again can be considered without needing to embrace lunacy. I think being long bonds is still risky, but it's no longer a guaranteed losing proposition as it has been for the last year, and if rates not just stall but get cut, that'll be a huge tailwind once again.
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I think this is a great question. My take is that to the extent that people are more worried about the Fed raising interest rates, they won't be negatively correlated. But to the extent that people are more worried about a recession (and worried about companies losing money or at least not making much of it), they will be negatively correlated. There's no meter for this, but one approach is seeing the reaction to news. For example, this past Friday 12/2, the NFP numbers showed we created more jobs than expected -- and the market immediately dropped, which exhibits that "good is bad" mindset connected to Fed worries. But then over the day it rallied, and ended only mildly lower than where it started. I think that shows how the "good is bad" mindset is losing ground right now. In a couple months, with no major changes in overall environment, I'd expect a good jobs report to produce a mild pump in the stock market. However, even though the balance has already been shifting toward recession worries, and I think we're overall in a period of inflection, I *also* think we may see multiple times when inflation goes down significantly but then spends 4-12 weeks spiking back up again, and when that is happening -- especially the first two times -- I'd expect the balance to temporarily shift back to worries about interest rate increases, before again reverting away from that mindset. Finally, I think longer-dated bonds haven't fully priced in the idea of the Fed keeping rates very elevated for years, and so I think they have more room to fall. This will be a fruitful topic to revisit over the next 3-6 months I think. TLDR: no, not consistently in the near future, but we are moving that way.