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Inverted Yield Curve + Inflation = Stay the Course

April 19, 2022
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Three weeks ago, the yield curve inverted for the first time since August 20191 (as a refresher, a yield curve inversion means that long-term interest rates have dropped below short-term rates).

Why do we pay attention to this?

Because this inversion suggests that investors believe the near-term economy to be riskier than the long-term.

This recent inversion in the yield curve and inflation soaring above 7% have left some investors wondering whether to adjust their investment strategy. While it can be tempting to worry and want to rush and make changes, the current environment is cause for monitoring, not cause for panic.

Yes, rising interest rates, high inflation, surging oil prices, and geopolitical tensions have helped contribute to economic uncertainty. And because financial markets don’t like uncertainty, they have been performing accordingly.

U.S. inflation clocked in at 7.9% for the 12 months ended February 2022 — the highest rate since December 1981 2. Energy prices, already on the rise, jumped when Russia invaded Ukraine. In response, the Federal Reserve started raising interest rates, hoping to slow the economy without triggering a recession.

Higher interest rates can be negative for the stock market, as the cost of doing business rises for some companies, potentially impacting their growth rates. However, Bloomberg data shows that in each of the last eight hiking cycles, stock prices were higher a year after the first increase. 

Fixed-income securities can be particularly sensitive to interest rate increases due to the inverse relationship between bond yields and prices. Despite increased short-term volatility, it’s important to remember the role fixed-income plays in your portfolio – diversification, preservation of capital, and income.

Despite the tumultuous road ahead for investors, it is important to refocus on long-term investing. Most news headlines are purposely crafted to be terrifying. Seeing the major indexes whip up and down can be nerve-racking. However, history has shown us that the investor that sticks with their investment plans and goals yield the best results. Below is a snippet taken from the Lincoln Financial piece labeled, "Building Confidence in Times of Crisis." It shows four different investors and their approaches to investing through the 2008 crisis. 

Clearly shown here, the two investors that chose to stay invested outperformed the two that did not. Much what is on the headlines are just noise. Experts have difficulty predicting what will happen in our complex economy. However, we do see time and time again that a patient and disciplined approach to investing yields good results. 

At Christian Wealth Management, we carefully craft our clients' portfolios to match their risk tolerance and financial goals. We use diversification, financial planning, and other financial products so that our clients will have the highest chance of success to get where they want to be. 

If you have questions or you need an opinion(or a second one) about your financial goals, I’m just a phone call or email away.

1https://www.reuters.com/business/finance/us-2-year10-year-yield-curve-inverts-first-time-since-sept-2019-2022-03-29/

2´╗┐https://tradingeconomics.com/united-states/inflation-cpi#:~:text=US%20Inflation%20Rate%20Hits%20New,of%201982%2C%20matching%20market%20expectations.