Buckle Up, Buttercup: Rates Will Stay Higher for Longer

Worsening conflict in the Middle East and Eastern Europe; elevated interest rates and stubbornly high inflation; a bitterly divided America… the daily headlines make me reluctant to face the morning news.

But don’t get befuddled by the media’s alarmism.

As Socrates said: “The only true wisdom is in knowing you know nothing.” No investor, no matter how experienced or knowledgeable, can predict the future with certainty. Recognizing this uncertainty and the limits of one’s knowledge can prevent overconfidence and reckless decision-making.

As always, you should stay diversified; avoid putting all your eggs in one basket; and maintain a margin of safety in your investment decisions. And in light of current conditions, brace yourself for continuing bouts of volatility.

Will the fighting overseas get worse and drive up oil prices? Will inflation continue to come in hotter than expected? Will this year’s U.S. presidential election lead to violence? No one really knows. Change the TV channel. Stick to your plan. In the meantime, let’s try to make some sense of the mayhem.

Higher-for-Longer Rates: The New Norm

Wall Street is currently betting on only two cuts by year-end, down from three. Hotter-than-expected inflation has taken a June cut off the table; the first cut is now expected to occur in September. Higher-for-longer rates are the new norm; get used to it.

Rising bond yields and geopolitical strife this week have been spooking investors and superseding positive data about the U.S. economy. The 10-year U.S. Treasury yield currently exceeds 4.60%, the highest since November. The spike in yields is pressuring growth-style investments, especially mega-cap technology stocks.

Oil prices have been volatile and currently hover near their highest levels in six months, as tensions in the Middle East dominate the cable news chyrons. Iran’s retaliatory strikes this week against Israel have caused jitters in global markets, as risks of a wider conflict in the region have risen. Israel and its allies were able to fend off most of the attack, but the world remains on edge.

A war-induced spike in energy prices would feed inflation, which in turn would further delay monetary easing. What’s more, OPEC+ in March signaled its intention to maintain production curbs into the second quarter of 2024. In addition to seeking more revenue, the oil cartel is determined this year to thumb its nose at the West.

Cartel partner Russia, in particular, has scores to settle with the Biden administration and other governments that have imposed sanctions on Russia due to its invasion of Ukraine. Rising inflation due to high oil prices is never a prescription for getting re-elected.

However, if modern history is any guide, geopolitical risks to the stock market tend to be short-lived, with markets governed over the long term by fundamental and technical factors. Rising yields are a concern, but the economy continues to hum along.

The Consumer Hangs Tough

The U.S. Census Bureau reported Monday that U.S. retail sales rose more than expected in March (0.7% vs. 0.4%), and February’s data was revised higher (see chart).

Defying inflation and higher rates, consumers have kept their wallets open. Control-group sales, which exclude autos, gasoline, building materials, and food services, climbed 1.1%, the most in a year. This control group is crucial because it’s incorporated into gross domestic product figures.

The downside is that this retail sales data, combined with robust payroll gains and hotter inflation, will dissuade the Federal Reserve from cutting rates anytime soon.

In my view, the positive outlook for economic growth is better than a recession, even though it means the Fed will get more cautious. Despite public opinion polls to the contrary, the U.S. economy is actually in pretty good shape.

As for war in distant lands, don’t get whipsawed by the scary “breaking news” bulletins. The world is rarely in a state of peace. Hence the never-ending justification for massive defense spending, which for dispassionate investors is a money-making mega-trend.

The beating of swords into plowshares ain’t gonna happen in my lifetime. Annual global defense spending jumped by 9% on a year-over-year basis in 2023, reaching a record $2.2 trillion. That astronomical number is on course to get even higher in 2024.

Despite the dramatic headlines, the bull market remains intact. A confident consumer and the rebound in manufacturing are fueling corporate profit growth, as evidenced so far this earnings season by encouraging operating results. But prepare for stock market dips along the way.

As you balance your portfolio, don’t ignore cryptocurrency. That’s right…crypto. Think crypto is too dangerous? Think again. Digital currency has minted a bevy of new millionaires.

As central banks move markets via monetary policy decisions, investors have sought refuge in decentralized assets such as Bitcoin (BTC) and Ethereum (ETH), which are perceived as immune to government manipulation and control.

Additionally, advancements in blockchain technology and decentralized finance (DeFi) have expanded the utility and functionality of cryptocurrencies, attracting a broader audience of investors and users.

Every portfolio should have exposure to crypto. But you need to be informed, to make the right choices. The experts at Investing Daily have done the homework for you.

Want to tap crypto’s opportunities, but with mitigated risk? Start receiving our FREE e-letter, Crypto Investing Daily. Click here now!

John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.