Last week, the yield curve inverted for the first time since August 2019 (as a refresher, a yield curve inversion means that long-term interest rates have dropped below short-term rates). The most important takeaway from these recent moves in the yield curve is that it very quickly widened. Yield-curve shape is not the only predictor of near-term return. Investors should remain aware but not fearful. With that being said, we are experiencing even wider spreads today than just a few weeks ago. While it can be tempting to worry and want to rush and make changes, the current environment is cause for monitoring, not a reason to panic.
Yes, rising interest rates, high inflation, surging oil prices, and geopolitical tensions have helped contribute to economic uncertainty. And because financial markets don’t like uncertainty, they have been performing accordingly.
U.S. inflation clocked in at 7.9% for the 12 months ended February 2022 — the highest rate since December 1981. Energy prices, already on the rise, jumped when Russia invaded Ukraine. In response, the Federal Reserve started raising interest rates, hoping to slow the economy without triggering a recession.
Higher interest rates can be negative for the stock market, as the cost of doing business rises for some companies, potentially impacting their growth rates. However, Bloomberg data shows that stock prices were higher a year after the first increase in each of the last eight hiking cycles. Of course, past performance is never a guarantee of future results.
Due to the inverse relationship between bond yields and prices, fixed-income securities can be susceptible to interest rate increases. Despite increased short-term volatility, it’s important to remember the role fixed-income plays in your portfolio – diversification, preservation of capital, and income.
Overall, we recommend staying on the course.
At MRK, we are here to help you navigate these choppy waters and keep you on track to help you pursue the future you picture. Rest assured, we will continue monitoring your investments and adjusting if necessary.