By now just about everyone has heard about the incredible I bond interest rates being offered at www.treasury.gov. Since these bonds adjust with the inflation rate every six months they are currently yielding 9.62%. With the Federal Reserve finally initiating a rising rate policy, soon even certificates of deposit will start to earn interest. Today I see Goldman Sachs offering a seven year note that yields 5.01% to maturity. The fed plans to raise rates again in September, and maybe again in November and December, so if you were wondering if bonds will ever yield anything again it maybe time to start to take a look as we near the end the year.
Raising interest rates does put the stock market in a state of flux as we have been seeing the first half of this year. This is not over. With inflation running hot around 8% or so and interest rates, as measured by fed funds, sitting around 2.5% there is still work to do. The fed is determined, we think, on lowering inflation which means rates will have to go higher. This will mean more volatility ahead for stocks, perhaps a lot of volatility, as we head towards the end of 2022. While the final outcome is far from certain and surprises can happen, investors must prepare for a re-test of the June lows. This is before we even factor in the geopolitical risks that are increasing by the day (Nancy Pelosi just landed in Taiwan this afternoon) and the surprises coming out of Congress as they decide how to stop spending by proposing packages that increase spending.
So for investors the $64,000 question remains…recession or no recession? The way the ‘R’ word has been popping up in the news as often as it has makes one wonder. Maybe this has all been just a pandemic mirage and the outlook for the economy it is full steam ahead with consumers spending their way right through the interest rate tightening and high inflation. Maybe…but the times are a changin’. As investors, I suggest working on your core, just in case, as you may need to take a few more gut punches. In addition, it’s time to pay attention and be prepared to invest when it looks like it would hurt the most. Patience and perseverance, especially if we slip into recession, will get you through.