Keys to Current Market Environment
At this point in the market – the QQQ’s (an ETF that mirrors the NASDAQ) have run way out ahead of other asset class’s year-to-date. The IWM (an ETF that mirrors the Russell 2000) have lagged considerably – they have moved up and down but are now even for the year.
Energy and materials/commodities have lost roughly 8% year-to-date – a terrible result.
The dollar has been sliding for roughly 40 days as a trend – see the UPP (an ETF that mirrors the US Dollar Index) – now it is hovering right at the support line – we need to see if it holds at the support line. If it breaks down, we could see material and energy do better – but also may soon see some selling in technology – at least a healthy correction.
This information leads me to consider a different asset allocation in the near term – now may be the time to increase our allocation in Treasury Bonds. If there is selling in technology, Treasury Bonds are a logical choice to receive some of the monies that may soon come out of the NASDAQ. I think the commodities space will benefit from this type of behavior as well. Another reason I think we should increase our allocation in Treasury Bonds – if we see a tech bubble begin to burst the price of Treasury Bonds should rise – creating an excellent hedge.
Current Interest Rate Environment
Consider the following:
Although US Treasury rates are very low historically – they are higher than many other countries rates at this time.
Eventually, based on GDP growth here in the US as well as globally and continued job growth – wages should begin to rise creating “wage inflation”. This more than likely will ultimately lead to real inflation – which in turn will encourage the Fed to address inflation with increasing interest rates to keep inflation in check.
What does this mean? For one, stocks should do well and high grade bonds as a whole including Treasuries will suffer (as yields rise the underlying asset prices will fall). The Banks & Financials sectors should benefit from these events as their margins and spreads on loans will increase as rates go up. When we see GDP starting to grow and inflation pressures – it will again be important to allocate the portfolio properly through this time. I believe when this time comes we will need to reduce our exposure to bonds then be prepared to reallocate back into them as rates move higher and hold. As we see GDP starting to pick up – keep an eye on the IWM – the small caps should begin to outperform.
Authored by: Michael McCracken CFP®, ChFC The information presented above has been prepared for informational purposes only and the commentary represent the opinions of the author and are subject to change at any time due to market or economic conditions or other factors.