Inverted Yield Curve + Inflation = Stay the Course

Dawn Baker |

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 guaranteed income.

So, in a nutshell, stay the course.

Your team is here to help you navigate these choppy waters and keep you on track to meet your goals. Rest assured, we will continue to monitor your investments and adjust if necessary.

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