Everything in the world seems to conspire to keep the dollar’s value aloft. But will that persist forever? Of course not.
Higher interest rates are coming. That’s bad news for bond investors, right? Not necessarily. Such a widely held belief can beguile you into making mistakes with your bond holdings.
After several years of solid stock market returns, you may actually be less afraid of risk. Maybe you question your asset allocation and strongly consider more stocks and other supposedly riskier assets. When balancing the temptation of ballooning returns with prudent and tested patience, though, choose the latter.
Central banks now lord it over the world’s economy. That has led to a lot of distortions and could end up harming the very system they seek to help.
Historically, stocks rise in anticipation of interest rate increase, because these hikes usually signify a healthy and expanding economy. That likely will be the case now.
The price volatility of government debt worldwide is worrisome – among other things because it might result in failures of bond auctions that could harm global markets. Even scarier is the widespread use of derivatives to hedge the risk of this debt, meaning the fallout could be still worse should this insurance fail to pay off.
Since the financial crisis, when both stocks and bond prices took a pounding, the normal pattern returned: Stocks zig when bonds zag. That usually meant that trouble in the world tanked stocks and buoyed bonds, particularly Treasuries. Nowadays, though, stocks and bonds may end up trading places.
Wall Street remains (more or less) consistently up and interest rates stay stubbornly down. If you want to follow conventional wisdom and balance stocks and bonds in your portfolio, what can you do to make predictable money on your holdings?
Rising rates and economic weakness is a recipe for market slumps. The likelihood, though, is that the pain will be short-lived, as it has been in the recent past.
The two biggest asset classes, stocks and bonds, won’t deliver much for investors. So says one of the sharpest financial minds of our time.