The market has again reminded us that stocks can move in two directions.
It’s an old story but easy to forget: When inflation expectations rise, so do interest rates—and stock and bond prices fall. For the first time in five years, the consumer price index in 2017 registered an annual increase of more than 2%, and prices rose more than expected in January. The January jobs report showed a jump in wages.
Inflation has yet to reach worrisome levels, but the stock market dropped sharply after each sighting, with investors worried that the Federal Reserve would start aggressively raising short term interest rates—something we have not seen in a long time. (Through the end of 2017, the Fed had raised rates by a total of just 1.25 points over 11 years.) Longer-term rates, not waiting for the Fed, have soared. The yield on the 10 year Treasury note rose from 2.1% to 2.9% in just five months (prices are as of February 16).
Maybe it’s time to invest in a hedge, an asset that will buffer a decline in stock values. But other than selling the stock market short (essentially, betting on a market drop), which can be risky and expensive, there is no consistent way to invest in something that’s guaranteed to score a profit when stocks score a loss. What about bonds? In 2008, when Standard & Poor’s 500-stock index dropped 37% and nearly every other global asset got clobbered, long-term U.S. Treasury bonds returned 25.9% as investors sought safety. The next year, as stocks recovered, T-bonds lost 14.9%. But as we have seen lately, bonds often move in tandem with stocks.
This story is from the April 2018 edition of Kiplinger's Personal Finance.
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This story is from the April 2018 edition of Kiplinger's Personal Finance.
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