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What I Care About This Week | 2022 Jan 10

Photo by Mabel Amber on Pexels.com

by Franklin J. Parker, CFA

The Summary

The Details

There has been quite a lot made of the rise of the retail trader, from meme-stocks to cryptocurrencies. I spoke with a friend of mine (and fellow NAAIM award-winner) last week about how retail traders following meme-stocks and random cryptocurrencies have outperformed professionals who are concerned about the risk pervading markets right now.

In many ways, this dichotomy is a symptom of the easy-money policy of the Federal Reserve. Professionals are obsessed with managing and weighing risk (upside risk and downside risk), and for the past several years, Fed policy has pulled downside risk out of markets, leaving professionals behind.

That is, now, beginning to reverse. I see 2022 as a transitional year. For the first part of the year, the Fed will carry an outsized influence, mostly weighing on markets as investors normalize their pricing. Toward the back-half of the year, however, we are likely to return to an environment where economic fundamentals matter again. For me, that is encouraging because economic fundamentals are what drive long-term, sustainable economic growth, and they are indicative of much more traditional kinds of investment risk that I am comfortable managing.

In the end, risk control does matter. As the tide goes out, we may well see who is swimming without a bathing suit.

Chart of the Week

Since mid-October or so, US Treasury yields have been range-bound between 1.35% and 1.70%. Last week, yields on the 10-year broke that critical 1.7% resistance level and have been on a firm move higher. This is putting downward pressure on bonds as well as growth stocks. Analysts estimate that there is still considerable room to run for yields. JPMorgan, for example, expects the 10-year to reach 2.25% by year-end.

As with any market move, there are winners and losers. While growth stocks (and tech in particular) are likely to struggle, bank stocks (especially smaller regional banks) are likely to benefit from higher yields and a steeper yield curve. Investors would do well to note the rotation and accommodate it in their portfolios.

10-Year US Treasury Yield

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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