No Treats This Year
Rubeus Hagrid
Halloween is here!
The Halloween decorations started on October 1st and people are going all out. I’ve never seen so many haunted houses. It is kind of exciting.
Cannot say the same for the stock and bond markets. This year has been more of a trick than a treat and scary for those who have become used to the stellar returns of the previous 3 years.
With two months left in 2022 it is unlikely that the stock market will recover to pre-2022 levels.
Now that we are entering the last two months of the year, I expect market activity to cool off.
It is likely the Fed will raise rates again next week and possibly in December. Causing bond prices to decline again. Those ghouls.
The Fed is not fiendish. The purpose of raising rates is to bring down inflation. Inflation that has been haunting us all year. We want lower food and gas prices don’t we?
Halloween candy this year is priced at an all time high. Bobbing for apples? Too expensive. Butterbeer may be hard to find with the price and scarcity of butter.[1]
Dementors have been sucking the life out of the party. We have the double headed monsters of inflation eating away our cash and market returns eating away at our investments.
When will the witches and wizards of the investment world disapparate?
November and December become chilly months on Wall Street as brokers and dealers take a “risk off” approach.
Brokers and dealers carry assets and liabilities on their “books”. They own stocks and bonds in inventory (the asset), and there is a financial cost (the liability) to keeping the inventory.
There is a good reason for portfolio managers to be concerned.
Both stock and bond managers have experienced terrible performance returns year to date.
Performance is what you see when you look at your mutual funds and exchange traded funds. It is the number that tells you if you have made money or lost money. Of course you don’t lose until you sell. Still, no one likes seeing negative numbers.
“Risk off” means brokers/dealers and portfolio managers cut back on the volume of trading.
When the volume of trading slows down, the bid ask spread can widen. Meaning you might see bigger differentials in the bid price and the ask price.
I’m not trying to scare you although I would love to on Halloween.
What I am talking about is more of a recap and a “what to expect” in the coming months.
The markets are not all doom and gloom. Higher interest rates are very favorable for savers.
If you have been sitting on a pile of cash at Gringotts Bank it might be time to engage a goblin in the purchase of short-term Treasuries.
It hasn’t been that long ago, the beginning of 2022 when you might get a yield of 1% .
Today you can buy a 2-year Treasury yielding 4.40%.
I liked the 2- year Treasury at 3.25% and bought a few. I liked the 18-month Treasury at 4.27% and bought more.
If the Fed raises rates again in November and December the 2-year yield could go higher.
But don’t wait too long because as soon as the Fed sees inflation start to go down, rates will come down. And you will be saying, “should have bought the 2-year at 4.40%”.
On that magical note I am off for a weekend of Harry Potter movies.
~ In Memory of Robbie Coltrane~
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
