There was nothing new in what Federal Reserve Chairman Jay Powell said this week, and if you think there was, then you’ve been living under a rock. Investing is dynamic. Make the plan and stay the course, advises Kenny Polcari, managing partner at Kace Capital Advisors LLC.
Okay, here we go. All the big boys are suddenly changing their tune after this week’s Fed commentary, with Blackrock and Goldman RAISING their estimates for the terminal federal funds rate. Both are saying that ‘we could see interest rates peak at 6%.’
But that is not new news. The Cleveland Fed’s Loretta Mester told us that weeks ago when everyone ‘pooh poohed’ it, saying that she was an outlier because her view was outside of the bell curve.
Remember going into this week’s hawkish testimony from “JJ” that the market had been pricing in a 5.1% - 5.4% terminal (neutral) rate – all while the FED has been pushing a different narrative – 5.5% - 6%.
As you might imagine, every sector got slammed, with Real Estate and Financials losing more than 2%. The others (Industrials, Utilities, Tech, Consumer Staples, Consumer Discretionary, Communications, Healthcare, Basic Materials and Energy) lost more than 1.5%.
And as expected, the hawkishness sent bond prices falling, causing bond yields to surge. The 2-year Treasury Note yield pierced 5% - the first time it has done that since BEFORE the GFC (Great Financial Crisis) that began in 2007.
Shorter duration T-Bills – think 6 months – are now yielding 5.27% and the 5 year is yielding 4.34%. CDs at the bank will now net you 5.25%. Let that sink in.
But while it was not pretty Tuesday, I wouldn’t suggest you ‘get out’, sell everything, and put your money into cash or cash equivalents if you’re in the 20 – 60 set. I might suggest you keep a higher percentage in cash / cash equivalents. But why are you selling your core holdings in names like Apple (AAPL), Microsoft (MSFT), JPMorgan Chase (JPM), and a host of others?
I’m using the weakness created in these wonderful mega cap U.S. monsters to add to my core position. I am not going way out on the risk scale, but that is also because I am 61, not 31 or 41. Understanding where you are in the life cycle, and the risk scale, will help you allocate accordingly.