My three-day rule states that upon any news-driven market crisis, wait three business days to move money.
Anyone who spent the weekend after Thanksgiving pondering risk from Black Friday's omicron shock benefited by standing pat.
Bond markets rallied all week despite the Federal Reserve's decision to quicken the pace of winding down its extraordinary bond and mortgage buying, thereby allowing long- and medium-term interest rates to float freely. That was supposed to slam bond values. Wrong-o. Oil prices tanked, a positive sign if you are afraid of inflation.
That said, omicron is now the lead story alongside the Fed's battle against rising prices.
I maintain that as shipping bottlenecks and spot shortages of computer chips and chicken parts lift and home prices and rents quit soaring, the official inflation indicators will slow. By late 2022 or early 2023, the 6.2% annualized readout will be below 3%.
I admit that I and many others missed the bump in inflation, figuring the legacy of 2020's COVID-19 shutdowns would be extended economic weakness, which tends to be deflationary.
Instead, America is a crazy and seldom-seen salad of surging economic growth, employment, wages and inflation – but also persistently low long-term interest rates and resilient securities values, supported by the unimaginable and unprecedented stockpile of investor, bank and corporate cash eager for high yields and growth opportunities. All that money needs repositories that beat a one-year T-bill's 0.26% yield.
The Fed can hike short rates several times in 2022 and savers will still find slim pickings.
Stick With High Yield
In this environment, I maintain my fervor for high-yielding investments despite their credit risk. Other income experts agree. The main reason is America's relative economic power.
Brandywine Global high-yield bond manager John McClain calls Europe a "slow-melting ice cube," but he deems the U.S. "in the catbird seat globally on vaccines and therapeutics." If COVID surges, "we're going to be the economy that stays open," McClain says. He avers that the Fed will not pump interest rates too much because the Treasury cannot afford ever-higher interest bills.
Emily Roland, co-chief strategist for John Hancock Investment Management, reiterates her pre-omicron love of corporate bonds rated triple-B and those rated below (junk level) amid evidence the new virus strain will strengthen an already strong dollar. In the municipal sector, "you get paid to go down the credit-quality curve," says Greg Gizzi, of Delaware Funds. Tax-frees were deep in the green yet again as 2021 expired.
I still endorse floating-rate bank-loan funds, preferred stocks and shares of short-term, high-interest-rate lenders. In the tumultuous week following Black Friday, two of my favorites, Flaherty & Crumrine Preferred Income Fund (PFD (opens in new tab)) and Invesco Taxable Municipal Bond ETF (BAB (opens in new tab)), made 1.60% and 1.00% respectively – quite a one-week haul for any fixed-income offering.
These are bold choices in a volatile environment. But this type of aggressive investment has prevailed for over a decade, and I see no reason to now blow the whistle.
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