Let’s dig into the numbers…
Analysts Updates – The Fed and the US Dollar Wrecking Ball
The Fed announced a second rate hike of 50-bps on Wednesday, we think another 50-bps hike is in the cards for June, but after that the outlook is bit cloudier. The market has fully priced-in 10 rates hikes in 2022 (to the 2.50-2.75% range) and one more in 2023 which would be the fasted pace of hikes since 1989. Powell’s tone was fairly hawkish at the press conference last Wednesday and the Fed also discussed its plan to start shrinking its balance sheet (Quantitative Tightening). According to Powell, the Fed expects to start QT on June 1st at a rate of $47.5 billion per month. Finally, financial conditions have already tightened significantly, for example the pop in mortgage rates is harming housing affordability and with further Fed tightening there will be more casualties to slow the economy further.
Our analysts from Hedgeye Risk Management just updated their GIP (Growth Inflation Policy) models with an expectation of deep Quad 4 for the remainder of 2022 and even into the 1st quarter of 2023. I believe they have absolutely nailed the market forecast with their GIP model and subsequent market crash call way back in mid-January. As a result of their market forecasts, we changed our portfolio models and became very conservative and have limited our drawdowns compared to the major market indices. We anticipate keeping a cautious and conservative approach throughout 2022 and into early 2023 unless something significant changes the model projections.
Here is the latest Quad Map from Hedgeye Risk Management (X-axis = Inflation / Y-axis = GDP):
© Hedgeye Risk Management, May 3, 2022
The 30-Year Bond Bull Market is Over – Aren’t You Glad You Don’t Own Bonds?
Remember in the early 1980’s when interest rates were in the high teens? My parents were telling me the other day that their first mortgage was almost 20%. Yikes!!! For 40 years, interest rates have slowly come down and bottomed out under 1% in 2020.
As interest rates drop, the price of bonds increases. This inverse relationship between bond prices and interest rates led to the wildly popular 60/40 portfolio rule that a lot of today’s retirees still adhere to.
If the 60% stock side of your portfolio was in correction mode, then the 40% bond side was most likely there to save the day. Now, with raging and persistent inflation, rates have started to climb rather quickly. This has led to the worst year for bonds since 1842 (-12% YTD). (see chart below)
So, what do you do when both your stocks and your bonds are getting clobbered in today’s volatile markets? This is the current dilemma for many of today’s retirees. This is why we have been such strong proponents of the Fixed Index Annuity strategy as an alternative to bonds. Fixed Index Annuities are not tied directly to interest rates like bonds, yet can provide the downside protection today’s bond holders are sorely missing out on. Remember, with Fixed Index Annuities you can lock in any gains each year without the fear of giving all those gains back when the markets inevitably correct. With more than 8 more 25 BPS rate hikes expected this year, there appears to be a lot more pain in the bond market.
Social Media Updates
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Thank You for Trusting Us
What an honor it is to serve our fine clients. It’s a job that we don’t take lightly. One item I would like our clients take a closer look at as we head into summer is to make sure you’re your beneficiaries are setup correctly on all of your TD Ameritrade accounts as well as your Fixed Index Annuities and Life Insurance policies. Please take a minute to login to your accounts at www.advisorclient.com and review that your primary and contingent beneficiaries are 100% accurate. This is also a great time to start thinking about updating your estate planning documents such as Wills and Trusts. One thing that Covid has taught us is that life can turn on a dime and not having an updated will or estate plan can leave your loved ones scrambling to make sense of it all. We have a wonderful estate planning attorney we would be more than happy to put you in touch with. He is not only a client of ours, but he has also helped many of our local clients get a much needed will or trust setup at an affordable price. Call us or reply here to learn more about how to get your estate plan completed. Thank you so much and God bless.
Investment Advisor Representative