Bonds Aren’t Always Safe | The Investors Edge
By John Stewart, chief investment officer at Farmers Trust Co.
Week in Review: Inflation’s Not Dead Yet
I’ve obviously discussed the inflation topic many times over the past couple of years, and it continues to be a hot-button item for markets.
Earlier this week, the Consumer Price Index inflation reading for March came in a bit higher than expected, and markets proceeded to drop in excess of one percent on the headline indexes. 86% of S&P 500 stocks were down an average of 2.1% on Wednesday.
Interest rates rose as traders went from pricing in 3 rate cuts by the Fed this year to only 2. The 10-year Treasury is nearing 4.6% after being below 3.9% as recently as the beginning of February.
If interest rates are going to stay higher for longer, and if inflation is an ongoing issue, that could cause further volatility in markets as we move throughout 2024.
Nevertheless, if higher rates and inflation are a sign that the economy is accelerating, it could ultimately help drive markets higher – for a while at least.
Featured Insight: Bonds Aren’t Always Safe
Most people believe that bonds are a safer alternative to stocks. They usually produce lower rates of return, but with less volatility, or risk.
This can certainly be true, but the bond market is a complex animal. Not all bonds are created equally.
Long-term bonds are very sensitive to higher interest rates, and can fall substantially in value when rates rise. You may ultimately get made whole, but you may have to wait until the bond’s maturity for that to happen. In the case of a 25 or 30-year bond, you might be waiting a while.
In addition, low-quality bonds issued by shaky companies could potentially default, meaning the company could fail to pay interest and/or principal payments in the event of bankruptcy.
Bonds can be an essential part of a well-diversified portfolio, but it is important to know what you own and how it will react based on changing market conditions and interest rate fluctuations.
Looking Ahead: Another Earnings Season is Upon Us
First quarter earnings season will begin next week with the large banks first out of the gate as usual.
We’ll get some insight into how well businesses performed in Q1, and more importantly, find out more about how they see the rest of the year developing.
Despite the rather strong equity market performance in the first quarter, earnings estimates for this year have actually been falling since the beginning of the year.
This isn’t abnormal, since estimates usually come down ahead of earnings season to allow companies to “beat” expectations.
What will be important, however, is to see if estimates fall by more or less than they fell last quarter – a drop of 1.9%. Stay tuned.
Copyright 2024 The Business Journal, Youngstown, Ohio.
