Dec 01, 2016
By Tory Meiborg, President and Partner at World Trend Financial
In the wake of the recent Presidential election, major US equity indexes have attained new all-time highs. Beyond the US stock markets, conditions have been far more difficult. Overseas markets have dropped into negative territory for 2016 and the dollar has reached multi-decade highs versus other major indexes. Perhaps the most dramatic move has occurred in bonds. In the two days following the election, it is estimated that global bond markets lost a collective $1 trillion in value.
To review, despite low absolute yields, bonds have provided relatively high returns for much of the last decade. This was a result of the inverse relationship between bond prices and interest rates; as rates continually fell, the price of existing bonds rose. Since the election, we have seen a reversal of the trend. There are many reasons for this, but the two most obvious are a more hawkish Federal Reserve bias and the anticipation of higher inflation under Donald Trump’s growth-driven economic policy.
As is often the case in prolonged bull markets of nearly any asset class, the longer a bull market lasts, the more dismissive investors become of potential risks. We believe this was especially true in bond markets. Considerations of interest rate, duration and credit risks were thrown by the wayside as yield-starved investors looked for some type of return on fixed income investments.
We believe bonds play an important role in most portfolios. However, we have also always recognized the risks that a fixed income investor has to evaluate, regardless of market conditions. While short-term movements will not sway our approach, we also believe the events of the last month has fundamentally changed the interest rate environment for the foreseeable future.
Please feel free to contact Tory at firstname.lastname@example.org or any of our financial advisors at World Trend Financial to discuss this or any financial issue.