Market Volatility, Higher Inflation Will Likely Continue in the Near Term
We expect volatility in the stock and bond markets while negotiations play out, and we note the shifting economic backdrop.
After spiking to its highest level in 13 years, nearly everyone is feeling the impacts of inflation. High demand, supply chain disruptions and rising costs for housing and labor are among the persistent factors causing prices to rise. We think inflation will remain elevated compared with recent years.
We’ve also seen the yield on the 10-year Treasury note continue its steady climb off pandemic lows. We expect it to stabilize between 1.75% and 2.00% this year.
What’s the Right Strategy for This Economic Environment?
Typically, rising rates combined with higher inflation can create challenges for certain bonds but opportunities for others.
For example, short-duration securities generally experience less price sensitivity than longer-duration bonds when rates are rising. Among short-duration issuers, we prefer corporate bonds that offer higher yields than government securities.
Treasury inflation protected securities (TIPS) may also merit consideration. Unlike other assets that investors have turned to as potential hedges against rising prices, TIPS tend to offer more consistent performance and automatic adjustments for inflation. Short-duration TIPS may provide a dual advantage in today’s climate by helping to reduce inflation and interest rate risk.
Higher rates and inflation affect stock portfolios as well. In broad terms, higher yields on the 10-year Treasury can make investors less willing to pay a premium for future earnings. As a result, companies that generate significant current cash flows may hold up better than businesses whose cash flows are forecast far into the future.
Meanwhile, rising inflation highlights the importance of identifying companies with strong competitive positions and the ability to pass along higher costs to their customers.
Don’t Let Headlines Lead You to Make Hasty Decisions
Volatility comes with the territory for investors. That’s why it’s so important to think about the market’s daily movements in the context of your long-term goals.
You should also ensure your investment strategy aligns with your personal tolerance for market fluctuations. And if you’re uncomfortable with how your portfolio has reacted to recent volatility, it may make sense to talk to your advisor about your strategy.