Douglas Drabik discusses fixed income market conditions and offers insight for bond investors.
Chaos, panic, and fear are not new to financial markets. Japan was slated to surpass the U.S. economy in 1979, a view well accepted and feared in the U.S. at the time. Back in 2000, the financial markets were absorbed in the world’s Y2K Scare, a spectacle of sorts where businesses and consumers feared that computers would stop working as time rolled past December 31, 1999, into the new century. Former Fed Chairman Alan Greenspan, in 2007, claimed the economy was heading towards double-digit interest rates due to expected inflationary pressures. Later that year, Goldman Sachs chief investment strategist Abby Joseph Cohen suggested that the S&P 500 would climb 14% to 1,675 by the end of 2008 (it actually fell below 900). In 2010, Meredith Whitney boldly predicted that there would be 50-100 sizeable municipal defaults totaling hundreds of billions of dollars. Later in her interview, she said it was something to worry about in the next 12 months. BREXIT was all the talk in 2017 yielding in 2019 to U.S./China trade war talks.
I am admittedly over-simplifying my statement only to make the point or ask the question, “Do financial markets tend to over-react?” After all, many of these predictions originated from some very smart and respected persons. Japan never threatened as the world’s economic leader. Japan has actually struggled economically for decades now. Y2K was a complete blunder with virtually no validity to the hype. Inflation never emerged. As a matter of fact, deflation was and has been perhaps a bigger concern. The municipal sector never realized mass defaults and has remained one of the safest fixed income sectors. BREXIT has become background noise and is now targeted to consummate January 31st. The current market mover is the U.S./China trade war.
Now here’s the point: It does not really matter if any of these things come true or if they actually have depth to their claim. They become sensationalized within the industry and press and they pack momentum that moves the markets. Therefore, when the masses support a movement, we cannot ignore it but at the same time, we cannot let it control our long term fixed income planning. The market impact of these sensationalized headlines tends to be relatively short-term, while the long-term direction of financial markets is driven by underlying fundamentals. When considering your fixed income portfolio allocation and the effect of headlines such as these, determine if you are attempting to trade on short-term market swings, or invest into a long-term financial plan.
Perhaps respected financial experts follow suit in much the same way politicians, coaches and employees “follow the herd”. One can no longer simply predict or anticipate an event’s effect without considering the psychology of the event and how it affects the market and investors. Rational or irrational claims can be justified and/or sensationalized. It is human nature and self-preservation that can influence our responses to such events. If “everyone” is leaning one way, and you decide to lean the other way, you are sticking out with unknown consequences. If you lean with the crowd, right or wrong, it will probably impart minimal consequences to ones reputation.
John Maynard Keynes said,” the market can remain irrational longer than you can remain solvent.” Fixed income for many investors isn’t for the moment but rather for the long haul. Getting caught up in the latest story or fear rarely improves or optimizes your fixed income return. The takeaway is to resist the latest market play and plan your fixed income investing to support your overall long term goals and objectives. When used appropriately, fixed income can protect your wealth while providing predictable cash flow and income. Don’t get sucked into the latest sensationalized event. Be a long term planner with your fixed income allocation.
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Stocks are appropriate for investors who have a more aggressive investment objective, since they fluctuate in value and involve risks including the possible loss of capital. Dividends will fluctuate and are not guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.