Broker Check
Inverted Yield Curve + Inflation = Stay the Course

Inverted Yield Curve + Inflation = Stay the Course

April 27, 2022
Share |

Recently the yield curve inverted for the first time since August 2019 (which means that long-term interest rates have dropped below short-term rates).

Why do we pay attention to this?

Because this inversion suggests that investors believe the near-term economy and markets to be riskier than the long-term.

This recent inversion in the yield curve and inflation soaring above 7% have left some investors wondering whether to adjust their investment strategy.  While it can be tempting to worry and want to rush and make changes, the current environment is cause for monitoring, not cause for panic. 

Yes, rising interest rates, high inflation, surging oil prices, and geopolitical tensions have all contributed to economic uncertainty. And because financial markets don’t like uncertainty, they have been performing accordingly.

U.S. inflation clocked in at 7.9% for the 12 months ended February 2022 — the highest rate since December 1981. Energy prices, already on the rise, jumped when Russia invaded Ukraine. In response, the Federal Reserve started raising interest rates, hoping to slow the economy without triggering a recession.

Higher interest rates can be negative for the stock market, as the cost of doing business rises for companies, potentially impacting their growth rates. However, Bloomberg data shows that in each of the last eight hiking cycles, the S&P 500 was higher a year after the first increase.

Of course, past performance is never a guarantee of future results, but the data suggests staying the course.

Fixed-income securities are particularly sensitive to interest rate increases due to the inverse relationship between bond yields and prices. Despite increased short-term volatility, it’s important to remember the role fixed-income plays in your portfolio – diversification, preservation of capital, and interest income.

So, in a nutshell, stay the course. Our sights are on the long-term horizon.

We’re here to help you navigate these choppy waters and keep you on track to pursue your goals. Be confident, we will continue to monitor your investments and suggest adjustments.

If you have questions, you know we’re just a phone call or email away.

Talk to you soon,

Michael Murphy

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Investing involves risk, including possible loss of principal. 

About Michael

Michael Murphy is an associate wealth advisor at Colorado West Investments Inc., a wealth management firm committed to providing exceptional, comprehensive financial services to high-net-worth individuals, business owners, and retirees. Michael is known for building strong relationships with his clients, helping them clarify their goals and values, and partnering with them to design a financial road map that will help them work toward their ideal life. He is passionate about walking his clients through the financial planning process and seeing the confidence and relief on his clients’ faces as a result. Michael has a bachelor’s degree in finance from the University of Northern Colorado and an MBA from the University of Colorado Denver. When he’s not in the office, you can find him outside, likely hiking or mountain biking, or digging into a book. Michael and his wife, Becca, have 6 dogs at home. Becca runs a dog training and boarding facility. To learn more about Michael, connect with him on LinkedIn. 

Investing involves risk including loss of principal. No strategy assures success or protects against loss. Content and opinions voiced in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Bonds are subject to credit, market, and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.

*Advisors associated with Colorado West Investments, Inc. may be either (1) registered representatives with, and securities offered through LPL Financial, Member FINRA/SIPC, and investment advisor representatives of Colorado West Investments, Inc. or (2) solely investment advisor representatives of Colorado West Investments Inc., and not affiliated with LPL Financial. Investment advice offered through Colorado West Investments Inc., a registered investment advisor and separate entity from LPL Financial.