Interest Rates Remain Front and Center: Market Commentary from Cabana’s CEO – February 8, 2022

2 years ago

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Interest rates (particularly their rapid rise) remain front and center on investors’ minds. We are right in the middle of earnings season and the ongoing re-pricing of future earnings due to the forecasted rise in rates has made for a volatile and unpredictable stock market. What appears to be a strong fourth quarter report for many companies can result in a big selloff when forward guidance provides even a hint of headwinds. This dynamic is compounded when the stock in question is trading at high multiples due to expected growth down the road. The higher the multiple and the further out the expected growth, the bigger the selloff can be.  

We have discussed rising interest rates in response to reflation of our economy many times in the past, so I won’t get too far into the weeds here. Suffice to say, I believe rates needed to rise and that the pain we are experiencing in both stock and bonds is part of our economic healing. I do not suggest that 7% year-over-year inflation is a good thing, but I also do not think we are in for that type of inflation long term. The jump in prices we are seeing now must be considered in the context of what has occurred in the world over the past two years as a result of the Covid-19 pandemic. For a long time, we have been much closer to deflation than inflation. As such, any move in the other direction gets amplified.  

Yesterday, I participated in a webinar with our professional advisor partners and presented the following chart, which I have highlighted to show significant periods of rising interest rates over the past 20 years. The purpose was twofold. First, I wanted to point out that stocks generally do well during periods of rising rates – especially in the beginning. The reason for this is simple. Rising interest rates are due to increased demand for goods and services. Strong consumer demand drives earnings and earnings drive stock prices. The second purpose in providing this chart is to illustrate the “normal range” for the 10-year Treasury Bond and the incredible impact Covid has had on rates. From this chart you can see that we have simply snapped right back to where rates were at the end of 2019. The vast majority of the recent jump in yield is due to our world and economy normalizing. Even as of this morning with the yield on the 10-Year approaching 2%, we are still at the low end of the trading range established in 2012.  

So, fear not rising rates. They are probably right about where they should be and relatively low historically. This means good stocks and even some bonds can and likely will remain attractive over the near to medium term. Be aware that volatility is likely to persist throughout the first half of the year as we all adjust to an economy walking on its own two feet unassisted. We are conscious of the fact that whipsaws and violent swings like we have seen over the past few weeks are an ongoing threat to investor sanity.  


January 17, 2024

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