It’s a Topsy Turvy World
We who work on preserving and growing wealth pay a lot of attention to the path of interest rates. Why?, you ask. Because interest rate movements and trends give investors indications of economic conditions which are beneficial (or not) to our investments in both stock and bond markets. Usually, that is.
Market Gyrations
We started off the year with a general consensus that, while the Federal Reserve, keeper of the policy determinations regarding interest rates, might stay on Hold (Fed Speak for “do nothing for the time being”) for a while, and the next actual move in rates would be down. Following the strong Labor report on June 6th, bond pricing showed a market change of heart to one expecting a Rate Hike.
The daily market gyrations as well as the longer term trend in inflationary pressures are influenced not only by Presidential tweets (the daily stuff) but also by the direction of the war in the Middle East The effective closure of the Strait of Hormuz through which much of the world’s oil passes, is pushing Global gas prices, fertilizer, food, and energy to new inflationary highs. Oil reserves are being depleted rapidly, and a near-term solution is not in sight (the long-term stuff). Even if a clear end to the war is achieved, it will take months and even years to get full Middle East oil production back online. This is occurring, of course, in the middle of the worldwide buildup of data centers and chip fabrication factories which need all of the above, not to mention our need for energy in general to power production and consumption of all things AI and internet.
So, what do these challenges mean for our investments?
The bond market is telling us things will get tighter, tougher, before they get better by pushing up the longer dated Treasury securities – the 10 Year Treasury rate is now 4.55%(CNBC), up from 4.21% on January 1 of this year. The bond market is telling us, “there is risk out there, and we need to get paid more for that risk.”
The equity markets’ investors seem to be largely convinced that the resilience of the economy in general will weather the energy challenges and disruptions. As we have seen in past oil supply shock disruptions, concerned investors don’t necessarily pull their money out of the markets, but rather put their money into different components of the economy. We may see more pullbacks in tech (semiconductors, for example) but more investment into Commodities (oil, minerals, gold, for example). We at Erickson have held on to International positions, to a small exposure to Gold, and to commodities in general which do well in times of rising inflation.
And let’s not forget Cash and Cash Equivalents. Cash not only provides a hedge against a severe correction, should one occur, but also it gives us the ability to buy positions in the perennial core drivers of our economy when they may be at an enticing valuation.
We have a new Fed Chair who wants to go in a different direction, several very large IPOs expected in the coming weeks, continued hostilities in the middle of a declared “cease fire” in the Middle East, and I could go on… We see lot of reasons to expect this summer to be a little hotter than usual. We retain a firm belief, however, that great companies will not only survive this turmoil, but will thrive over time for our long-term investors.
To perhaps get more clarity on these issues and more, please join us for our Quarterly Market and Investment Update Zoom on Friday, July 10th. Look for the announcement and invitation in the coming weeks.
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