The markets mixed signals

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

The year's first five months have provided investors with bountiful financial blessings. The stock market has delivered full-year returns in less than half a year. The S&P index's total return is 11.3% year-to-date. The bond market has also provided healthy income opportunities. The 10-year Treasury has averaged a 4.3% yield reaching a high of 4.7% and currently hovering around 4.46%. This translates to high-quality corporate yields in the mid-5% range and longer-term municipal tax-equivalent yields north of 6%.

So why is there so much angst among investors? The mixed economic signals may have a lot to do with it. We are informed on how resilient the market has remained. The Gross Domestic Product (GDP) measures the final market value of all goods and services produced and is an accepted measure of our economy's performance. The last three-quarters of GDP year-over-year data have shown economic performance was better than the 30-year average of 2.5%.

Personal consumption has wavered vastly since the 2020 pandemic; however, consumers have resisted the sticky inflation the economy endures. Whether consumers have accomplished this with second jobs, accumulated savings from the pandemic period, or government-infused funding, spending has enabled corporate earnings to stand out while goods, and in particular services, are used.

As disposable income declines, the feel-good tone seems tentative at best as consumers rely heavily on credit. Who hasn’t felt the impact of higher personal consumption costs? Credit card debt has exceeded $1.3 trillion as the cost of goods and services increases and inflation eats away at purchasing power. The market tends to agree as investors are pricing in Fed rate cuts. The Fed might cut interest rates during a weakening economy or elevating unemployment. And there’s the rub. Investors are pricing in a cut while the economy seems to be thriving and employment reports are strong.

Investors may be getting ahead of the economy’s pace. Fed cuts, consumer pull-back, and economic decline will likely pull the stock market and interest rates down. The best financial offense may be a solid financial defense utilizing individual bonds. Invest in high interest rates and lock in as long as possible while rates remain elevated. The only data that has been free of conflict is that interest rates are higher than they have been in over 17 years. If investors, based on market behavior, are correct, the window of opportunity for locking into higher income levels has a limited life. Once rates begin to fall, it may eradicate stock gains and drop fixed income rates. The clarity among the muddy economic waters is the high-income opportunity obtained through individual bonds.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.