‘A Yield Sign on Inflation’

Copy of Copy of 402 Protactical Post

Fixed income yields have finally taken a pause from their rapid ascent this year. When yields move up, the price of bonds move down. Fixed income investors have keenly felt this phenomenon with the Bloomberg US Aggregate Bond Index down -9.5%  year-to-date as of Friday, May 13th. This is a significant drawdown for an area of the investment world that generally represents a safe space from the volatility of equities. But yields have fallen recently as documented by the chart below, and that means that bond prices have bounced back a little bit, up almost 1% from May 12th through the 13th.

And you may be wondering where this brief bit of bond optimism is coming from? The Federal Reserve is still hawkish in its monetary policy which can push short term rates up and bond prices down. The equity markets have been falling for most of the year but that has failed to push rates down and bond prices up in 2022 like in past years when investors fled risky stocks to the relative safe haven of fixed income.

It seems that some of the recent fixed income optimism has come from falling inflation expectations. The chart below tracks the 10-year breakeven inflation rate which is the difference between the yield of a 10-year Treasury note and a Treasury inflation-protected security of the same maturity. It gives the fixed income market’s inflation expectations. We an see in the chart below that the forward-looking inflation gauge has begun to fall after spiking earlier this year. We began this year with the breakeven inflation rate at 2.6% and currently the rate is at 2.7%. Of course, this does not reflect the current inflation environment that we experience every time we pay for something now. Rather, these rates are where the market sees the inflation rate heading over the next 10 years.

It is important to note that these are just expectations, not guarantees. Traditionally, the fixed income market has been considered more prescient than the equity market, but it is not omniscient. The collective fixed income market can be wrong, as they have been at points in the past. However, these chart trends can serve as a helpful reference for helping us understand what the market is currently pricing in.                     

Performance is no guarantee of future results.   Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation.  One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.

Model Updates

The long-term trend for domestic small-cap equities turned unfavorable last week, so the EWM Investment Solutions Asset Allocation models reduced their exposure to small cap stocks on Wednesday, May 11th. On the same day, the Focused Income model eliminated its position in an emerging markets bond fund, and the Alternative Asset ETF Opportunity model decreased its allocation to the cryptocurrency space while adding a managed futures strategy fund. 

There were no other trades in the EWM Investment Solutions models during the week ending on May 14th, 2022. Large-cap domestic equity still maintains its long-term favorable trend, and U.S. stocks remain over-weighted versus international shares in EWM’s Asset Allocation models.

Quote of the Week

By all means, worry about war, disease, deficits, and democracy, and blame the left, the right, the lazy, the greedy—even stock market reporters if you must. But try to maintain a long-term investment mix of 60% optimism and 40% humility.

Barron’s columnist Jack Hough commenting last week on the importance for investors to maintain an allocation to risk assets like stocks in every environment and on the difficulty in timing market swings during difficult periods.

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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.

1 Week = closing price on May 6, 2022 to closing price on May 13, 2022

   1 Month = closing price on April 13, 2022 to closing price on May 13, 2022

3 Month = closing price on February 11, 2022 to closing price on May 13, 2022

 YTD = closing price on December 31, 2021 to closing price on May 13, 2022

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