In a very volatile week, the Dow (+1.2%), NASDAQ (+1.7%) and S&P 500 (+1.4%) finished in positive territory. Meanwhile, taxable bonds and tax-free municipal bonds also gained about 0.4% - 0.5% for the week. With the bond gains, the 10-year Treasury yield dropped to 3.38%, a sharp drop from almost 4% less than three weeks ago. Interest rates have taken over as the main headline.
Lots of economic data poured in last week, and most of it was positive. That put the Fed in a very difficult position, as they are fighting the conundrum of a strong economy and jobs market and elevated inflation, which create pressure to raise interest rates. However, we are experiencing a fragile banking system that fell prey to a sudden rise in interest rates after almost a decade of near-zero rates, causing the Fed to reconsider their interest rate hike program. So, while the Fed has announced that it will continue to raise interest rates to combat inflation, they must be aware of potential concerns with the smaller banks.
I have to admit that I am thoroughly confused right now. In a document provided last week by John Hancock Investments, they reported that the bond market has priced in no rate hike in May, and then 0.25% rate cuts four times for the rest of the year. Wait a minute! The Fed just said one more rate hike, but the bond market is pricing in four rate cuts, and the word on the street is that the bond market is smarter and usually right. As you can see, the bond market is in direct conflict with the Fed, so who is right? Needless to say, this has a direct impact on our investment decisions for our portfolio management, so we are fortunate to have scheduled a conference call with the Chief Investment Office of John Hancock this afternoon. Hopefully, we can obtain some clarity on this topic.
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