February Newsletter to Clients

Enjoy this month’s edition that features a look at an often-overlooked economic measurement and a thought about giving some of your wealth away while you’re living.

Have you ever walked into your kid’s room to find them bouncing up and down on their bed and, literally, off the walls? It’s uncanny how this always seems to happen at bedtime. At that point you summon your inner parent, that lies dormant most of the time, to become the adult in the room. 

Now, to paint a picture of the investing world, the stock market is the child bouncing on the bed. Stocks can be irrationally exuberant one day and morose and sullen the next. Over the long term they are excited about the future and just have to express that excitement by bouncing on the bed. The stock market includes professional investors, people saving for their retirement by owning stocks through mutual funds, and dudes buying stocks on Robinhood because the company name sounded cool. 

The bond market, in contrast, is the adult in the room. While stocks are Just So Excited, bonds are saying, “hang on, let’s examine the numbers and test what might go wrong.” The bond market is primarily made up of professional investors who know what they’re doing. 

While the financial news often mentions the stock market movement each day, most of us professional investors look closely at the bond market as an indicator of investor sentiment about economic conditions. Specifically, the yield on the 10-year Treasury bond  - that is the interest rate the federal government pays to borrow money for a decade – tells us a lot. For instance, mortgage rates are often based on that metric and higher or lower rates can impact  home sales. Higher yields over a longer period of time can negatively impact the stock market as higher borrowing costs can hamper companies’ abilities to grow. Higher rates can also hurt the federal government as the rising debt becomes more expensive to service. Conversely, higher yields can mean larger payouts to the bond mutual funds we hold, although bond prices fall when yields rise so the values of our funds are also affected. 

So, what have bond yields done recently? Late last year and into early January, the yield on the 10-Year shot up from 3.6% to 4.8%. Not coincidentally, stocks stumbled a bit during that period. The yield sits at 4.43% as I write this in early February and stocks have recovered from the earlier swoon. 

What to expect? Michael Hartnett, chief investment strategist at BofA Global Research was recently quoted in Barron’s that, although he believes bond and stock markets will both rally later this year as he expects the 10-Year yield to dip under 4%, he sees rising bond yields as the No. 1 long-term risk faced by investors. 
Bonds can be complicated so I’ll stop there. But, next time you’re perusing the day’s financial results, take a look at the yield on the 10-Year Treasury and note it’s daily movement. I’ll write more about this subject throughout the year.

A recent Schwab study revealed that just 21% of high-net-worth baby boomers said they want to transfer their money to the next generation during their lifetime. While one has to focus on one’s own needs first, gifting some wealth to family or to charitable causes while you can still enjoy the results has real value for some. Interested in planning some gifts? Give us a call and let’s discuss how that might work. 

Thank you for your continuing confidence.

Ramsey Bova, President & Owner, CFP®