Steel yourself for six more months of instability.
The model: In May, the Federal Reserve hiked short-term interest rates by half a percentage point, the most in a single adjustment since 2000, and promised to do it again and again until inflation slows.
Stock prices curiously rallied as long-term interest rates fell back, also generating gains for bonds and bond funds. But after a night to contemplate, the rabble of day traders, debt-and-inflation scolds and Fed cynics undid the gains and then some, in both bonds and stocks. This turbocharged the fears of an extended and all-encompassing decline as oil prices re-escalate, high mortgage rates strangle the housing boom, and jobs, business profits and consumer spending gradually weaken.
In such a world, everyone with diversified savings and investments is in zugzwang, the chess player's trap where every possible move makes you worse off. The preventative to that is to find risk-free refuge. I’m seeing one-year certificates of deposit paying 2%. It has been a while since that was on offer. Grab it if you have had your fill of turbulence.
But I am not equating volatility with hopelessness. Plenty of higher-income-paying stuff, despite being in the red so far in 2022, looks oversold. Hence, I forecast better results in the second half among key yield-oriented sectors: taxable and tax-exempt municipals, preferred stocks, utilities, real estate investment trusts (REITs), and corporate bonds rated A and BBB.
The few actual first-half winners are also still safe. Energy investments will continue to thrive, floating-rate funds remain timely, and you can now accumulate two- to five-year Treasuries with respectable coupons. If you are watchful, you will get chances to buy quality bonds, funds and bond-like assets on dips. Don't fret about missed or reduced dividend or interest payments. You are more apt to get a raise.
Most of the Market's Losses May Be Behind Us
After interest rates have risen as they have, and with slower economic growth increasingly likely, I cannot see another two quarters of 10% principal losses in short- and intermediate-duration debt. How much more bond selling makes sense, especially as the yield curve flattens and long-term Treasury rates stop climbing so much?
A bunch of fixed-rate preferred stocks with tax-advantaged dividends are nearly 20% below their $25 par value, and similarly rated issues (around BBB-minus) from such financial luminaries as Allstate (ALL (opens in new tab)), Bank of America (BAC (opens in new tab)), Capital One (COF (opens in new tab)), Morgan Stanley (MS (opens in new tab)) and U.S. Bancorp (USB (opens in new tab)) are priced for a current yield at or above 6%.
The rare year-to-date slide in municipal bond prices followed a long spell of outperformance. Now, munis dated 10 years and longer are commonly priced to yield more than equivalent-maturity Treasuries – a buy signal for tax-exempts, and that is before you calculate your taxable-equivalent yield, which may exceed 7%.
The war in Ukraine is a boon for domestic energy investments. A raft of 10- to 20-year issues from oil and natural gas firms, pipelines and related industries, rated investment grade or just below, are priced to yield 5.5% or 6% to maturity, with the possibility of price-boosting credit upgrades.
You get dramatically more value in a number of areas today. That is why I am confident the balance of this year will be less daunting, and possibly more rewarding, than the beginning – at least for discerning investors.
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