It’s wise to adopt a cautious stance on equities. Central banks around the world are raising rates; and in the United States, we would expect a few more minor (25 basis point) hikes this year. In the case of overtightening, this may lead to a global economic recession.
As for the bond market, yields have risen and are attractive, especially short-term bonds. Given the shaky ground that economic participants are standing on, we think it’s best to stick with high quality bonds. Junk bonds come with heightened risk at the moment. Treasuries yields are still attractive but there is the question of Congress’s deliberations over the debt ceiling.
One of the questions on everyone’s mind is what is happening with inflation. Experts are predicting that inflation is likely to persist, albeit lower than the recent past, with geopolitical tensions as elevated as they are. The aging workforce has led to a tight labor market, which presents another source of inflationary risk. The United States still hasn’t overcome the effect of rapid money supply growth during the first two years of COVID.
Business owners and the banking crisis
The Fed’s recent bail outs and willingness to harbor the offloading of problem securities has made it clear they aren’t willing to let banks fail. Looking back to the 2008 crisis, we recall that credit risk (real estate loans, etc.) was the fatal flaw. However, these days the big issue facing banks is interest rate risk, or the mismatch between the interest rate sensitivity of the bank’s asset portfolio and that of its deposits. Banks tend to hold bonds that carry a higher interest rate than they pay depositors. A sharp rise in rates will cause the value of the bonds to drop. If the bank has to sell those bonds to satisfy a run on deposits, they will recognize a loss on their investments, as was the case with Silicon Valley Bank.
Given all of this, business owners are wondering where to keep their money safe while also having enough liquidity to pay employees every month. You may be seeing headlines about CDARS, or Certificate of Deposit Account Registry Service. They allow you to gain exposure to CDs from many different FDIC-insured banking institutions. Please ask us if this is something you are curious to learn more.
A time to be vigilant
Overall, we’d give the economy a B-/C+. With a report card like this, it’s time for vigilance. With so many dynamic variables in play, risks abound. It’s important to make sure that your portfolio and financial plan align with your life position. If you would like to discussion your personal situation, please reach out.
BlackRock Investment Institute. 2023 Global Outlook. https://www.blackrock.com/us/financial-professionals/insights/blackrock-investment-institute/outlook
First Trust. (2023, March 27th). Monday Morning Outlook: The Fed Waffles. https://www.ftportfolios.com/Commentary/EconomicResearch/2023/3/27/the-fed-waffles
Smedly, Brian. (2023, March 20th). Guggenheim Investments. A Not-So-Funny Thing Happened on the Way to the Terminal Rate. https://www.guggenheiminvestments.com/perspectives/macroeconomic-research/not-so-funny-thing-happened-on-way-terminal-rate