No Fooling – A Silver Lining for Investors

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

For lack of a better word, the fixed-income mantra is getting stale. Interest rates have peaked, and they remain at elevated levels, allowing investors to take advantage of higher income and ample cash flow opportunities. Before boredom influences investment behavior and dismisses this opportunity in hand, digest the positive long-term potential effect that this carries. It has been nearly two decades since investors have had the opportunity to capitalize on yields at these levels, yet questions abound as to the timing of implementing such a strategy. The perplexity is amplified by the resounding projection from economists and pundits alike, that conditions exist to suggest interest rates are likely to decline over the next year. In addition to all this is the fact that an average investor might have roughly 40 years (ages ~25 to ~65) to optimize the dollars put aside for investing in a lasting retirement plan.

The lack of confidence to implement a fixed income strategy may center around the present-day elongated economic cycle. The bond market has failed dramatically to comply with a society shaped by instant gratification. The Fed was already supposed to have cut interest rates, inflation should have diffused back toward 2%, consumers should have run dry of disposable income, corporate earnings should have retracted, and unemployment ought to be sharply higher by now. Since none of these events have met their hurried timeline, the economic cycle “must” be off tilt, so consumers doubt that the economic cycle will play out. All is fine and will remain fine?

A more likely reality is that intervention and grossly understated liquidity stockpiles have helped to lengthen our current economic cycle. Despite growing debt, increasing consumer interest payments, and diminishing savings, sidelined cash has pushed stocks to historic highs monopolizing consumer attention and overweighting growth allocations. Stocks have continued to soar during a period when inflation is proving to be sticky, yet consumers continue to spend, and employment is considered full. The Fed has not needed to change policy while individuals have paychecks to spend and the economy sneaks forward. Even the most pessimistic analysts must pause at the robust liquidity.