Welcome to the June edition of FAQ’s and RAQ’s!
Here we answer client questions, some asked Frequently and others asked Rarely.
FAQ: Bulls vs. Bears - Who’s got it right?
Both sides have compelling arguments.
If the bears are right, it’s because the conventional playbook still works. Fed rate hikes will cause a recession and another stock market decline.
On the other hand, if bulls are right, it may be due to:
- The “Carpe Diem” consumer: Americans are ready to reclaim their lives following COVID and are eager to spend.
- Artificial Intelligence: The new technology could inspire investors to look past near-term risks.
- China’s recovery: The world’s second largest economy is re-opening following COVID.
- No credit crunch: Fed Rate hikes typically lead to a credit crunch, but high inflation has lowered the real cost of corporate debt service, and regulators seem to have preempted a regional banking crisis.
- A slowdown is priced in: Last year’s 25% slump in stocks may have already factored in an economic slowdown.
So, who’s got it right? The truth likely hangs somewhere in the middle of the Bull-Bear tug-of-war. Last year’s lows were likely the market bottom, but that doesn’t mean stocks are set to skyrocket.
RAQ: What’s the most underrated asset class today?
High yield corporate bonds, in our opinion.
Investors are skeptical of the asset class, given that the yield differential between high yield and investment grade corporate bonds hovers around historical averages, even with looming recession risks.
This skepticism, while understandable, overlooks the solid case for high yield bonds today:
- All-in yields are historically attractive and are competitive with historical stock market returns.
- High inflation has decreased the real cost of corporate debt service, which means widespread defaults may be avoided.
- The burgeoning Private Credit asset class has siphoned away many of the lowest rated issuers from the high yield bond indices, which means historical yield comparisons may be less relevant.
For those considering high yield bonds, a diversified mutual fund is a safer choice than individual bonds.
RAQ: Callable CD’s vs. Non-Callable CD’s, which is a better option?
Callable CD’s typically offer higher yields. But there’s a catch: banks can redeem callable CD’s before their maturity date, which could cut your high interest earnings short, especially if interest rates fall and banks aim to re-finance deposits at lower rates. Thus, non-callable CD’s may be a better option for investors looking to lock in rates for a fixed period.
Naturally, the ideal choice hinges on CD rates, terms, and individual investor profiles.