What’s Happening?
Interest Rates…
Here is a quote from Warren Buffett in 1994 regarding interest rates…
"The value of every business, the value of a farm, the value of an apartment, the value of any economic asset is 100% sensitive to interest rates. The higher interest rates are, the less that present value is going to be. Every business, whether it's Coca-Cola or Gillette or Wells Fargo — its intrinsic valuation is 100% sensitive to interest rates."
Like Warren said, when interest rates increase, nearly every business/individual has less money to allocate. This ultimately matriculates through the entire economy. Typically hitting the most speculative sectors the hardest.
In just over a month, the 10-year treasury has increased from 1.3% to 1.9%, for nearly a 50% increase. This large jump in rates has led to stocks and bonds repricing lower.
Where do we go from here?
The market and federal reserve will continue to flush out where rates, inflation, and labor markets are headed.
Taking an alternative point of view, this reflationary period for interest rates could be the necessary evil we needed. If rates normalize, this could be the first step in uncoupling the federal reserve and financial markets. It could also lead to investors finally finding opportunities for yield in the bond market.
In closing, this is why we consistently review and revise our client’s risk tolerance and portfolio allocations. When there is excessive risk-taking occurring around every corner, it’s extremely difficult to not get caught up in the emotion. On the equity side, we’ve remained neutral and have been adding to high-quality domestic and international stocks. We continue to remain neutral in our allocations while looking for an entry point to rebalance if markets continue to sell off.
As always please don’t hesitate to reach out if you or anyone you know has any questions at all.
