Rising Rates and the Bond Market Sell-Off
I have received many questions on what is wrong with the stock market. The quick answer is bonds and interest rates. As interest rates go up, growth stocks go down. This happens because growth stocks borrow money. As interest rates rise, so does the cost of doing business. The higher costs make it less attractive to grow.
It is still in the early days, but the stock market response to the bond market sell-off has been to take growth stocks out of portfolios. This is the consequence of the growth stocks being extended. It is a good time to take profits from growth stocks to deploy money to the market's value stocks. Like I have mentioned in my previous article, inflation is coming. We must factor in the effects of inflation coupled with rising interest rates on portfolio construction.
Now I am not promoting getting entirely out of growth stocks, but diversification into value stocks is called for here. Another factor: the infrastructure bill will fuel the value sector, since repairing a highway doesn't take many Zoom meetings. Rising rates still affect value stocks, but not to the extent that it does growth stocks.
Therefore, do not despair. We are still entering a booming, reopening economy, but where the boom will take effect remains to be seen. That is why I am stressing diversification and valuation as a critical discipline in allocating your portfolio.
If you’re already a client, you can rest assured that your portfolio is already accommodating these issues.