The yield on the 10-year U.S. Treasury note recently settled at 2.77%, it's the highest level since January 2014. What does that mean for income-seeking investors?
Well there are three things to consider according to Jamie Cox, a managing partner with Harris Financial Group of Richmond, Va.
First, some stocks, such as utilities, telecom, and consumer staples, will suffer a bit, as less risky investments -- like Treasuries and corporate bonds -- will now be able to compete with those high dividends. "As yields rise, the risk/reward of owning a stock simply to get its dividend becomes less appealing to some investors," Cox said.
Second, high-yield, lower-quality bonds are in the same predicament. "As rates rise for higher quality corporates, investors are likely to trade up for stronger balance sheet companies if the cash flow is now sufficient to cover their income needs," he said.
The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) has a 12-month yield of 5.14%.
Third, though some opine that a major event is coming for bonds and stocks (and of course anything can happen) there is, Cox said, "a wide body of evidence that suggests that interest rates won't become an impediment to growth for several hundred basis points -- think 4% federal funds." What's more, he said, the "trip through 2% to 3% is very positive for stocks and the economy."
And fourth, investors need to consider the reinvestment of interest payments and the repayment of a bond at maturity when considering what to do as rates rise. "Paying attention to the duration of your holdings is incredibly important," Cox said.
Charlie Ripley, a senior investment strategist for Allianz Investment Management, notes that the FOMC left rates unchanged as Janet Yellen passes the baton over to Jay Powell, but he suspects that will change at the March meeting as the views on inflation are likely still divided. "We do, along with other market participants, expect a rate hike at the March meeting, and the Fed to continue the process of gradually raising policy rates with the expectation for three hikes in 2018," he noted.
Is This as Good as it Gets?
The state of the union, from an economic standpoint, is excellent, according to Brad McMillan, chief investment officer at Commonwealth Financial Network. "The question we have to worry about, though, is whether this is as good as it gets," McMillan wrote on his blog, The Independent Market Observer. "There is mounting evidence that, indeed, this is the case. As such, the state of the union today is not a good guide to where we will be a year from now."
Records, Risks and Returns
The recent streak of market tranquility is one for the ages and we do not think it will continue much longer, John Lynch, chief investment strategist, and Ryan Detrick, senior market strategist for LPL Financial, wrote in a recent report. "This isn't a bad thing, though, as any weakness could present an attractive buying opportunity for suitable investors," they wrote. "Buying the dips has been a prudent strategy during mid-term election years historically, and throughout this bull market, while the macroeconomic backdrop is supportive, including accelerating global economic growth, strong earnings gains, and the impact of the new tax law. Bottom line, stay the course, look for further gains over the balance of the year, but be prepared for the possibility of a typical, yet bumpier ride."
Given recent U.S. dollar weakness, some investors have become worried that the peak in the dollar already has occurred -- and that the dollar is set to collapse over the next few years, Austin Pickle, an investment strategy analyst with Wells Fargo Investment Institute (WFII), wrote in a recent report. "Keep in mind that WFII's 2018 forecast is dollar-neutral, and we do not expect a massive move lower," he wrote. "But if the dollar does decline dramatically, investors have asked whether this could result in a runaway bull market in commodities. We doubt it."
According to Pickle's report, when a dollar bear is working in conjunction with a commodity bull, commodity returns tend to be exceptionally high. "But when the dollar bear is fighting against a commodity bear, the commodity bear historically has won, and returns have been low," he wrote.
So, what does this mean for investors? "If the dollar collapses, we do not expect commodities to enter a bull market," Pickle wrote. "We expect bear market dynamics (oversupply and range-bound prices) to dominate commodities for the next five to 10 years."
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