It’s hard to believe we are halfway through 2023.  It’s even harder to believe that after several major bank failures and the persistence of above average inflation, the markets have performed so well.  This is a great example of why it can be so important to stay invested, even in uncertain times.  Let’s start with a peek at the market performance year-to-date as of May 31st:

If you compare this to the end of Q1, the biggest change is the return in the Nasdaq.  Tech stocks have had an impressive rally, primarily driven by the recent interest in AI.  At this point in the recovery from Q4 2022, there are many opinions as to what is next for the markets.  The near-term movement will depend heavily on inflation data and the predicted path of the Fed.  Fed Chairman Jerome Powell is currently projecting an additional one to two modest hikes to bring inflation down to more manageable levels.  Many investors remain wary, and that is understandable.  The quick pace of this recovery has been surprising for even the most experienced investor.  With that being said, money market funds (MMFs), bonds and CDs continue to be a great opportunity for those who are happy to make 4-5% without taking the risk of another equity downturn. 

It’s important to understand the difference between MMFs, bonds and CDs.  MMFs have an advantage that they stay “pegged” at $1.  So the value of the investment stays stable in a rising rate environment.  However, that comes at a cost.  Money markets are variable rate.  So that 4-5% you are currently earning, can very quickly go back to the 0-1% that we are used to.  The advantage that bonds and CDs provide, is that they lock in the rate for the “term” of the bond or at least until the next “call” date (note: many bonds are not callable before maturity).  Whether that is 1 year or 30 years, you will continue to earn the rate you bought at.  You may be familiar with bond behavior, in which when yields come down, bond prices rise.  This can be a game changer for long-term investors.  Not only can you lock in unusually high rates right now, the value of your investment can increase dramatically if and when rates start to come back down.  Money markets will just stay at the same price, but will pay you less if their yield drops. 

This may also be a great time to use a “bond ladder” in your portfolio.  With this strategy, you buy bonds will varying maturities (e.g. 1 yr, 3 yr, 5 yr, 10yr, etc).  This will guarantee that you have cash at points in time that you can reinvest in either equities or fixed income depending on the market environment. 

We certainly can’t predict what comes next, but now is a great time to talk to your advisor about ways to take advantage of the higher yield environment and lock in rates that may not stick around for long.

Should you have any questions about the markets, specific opportunities, or your portfolio, we highly encourage you to schedule a meeting with your financial advisor today.