Equity markets have been reacting negatively to higher yields and inflation fears for the past few months. In the interim, we’ve focused on medium-term growth and cyclicals as these stocks tend to align with economic cycles. With economies recovering we are protecting our gains and looking at inflation as the main driver our short-term strategies. In addition, this cycle should pick up in the second half of the year when economic growth is forecasted to really pick up.
German and Japan Yields
Higher bond yields offer an alternative to equity payiing dividend stocks and offer a higher discount to long-term cash flows. Yields have started rising as economies come out of “lock-down” increasing the potential for tapering and more headwinds in the markets.
“The fear is that these assets are priced to perfection when the ECB and Fed might eventually taper,” said Sebastien Galy, senior macro strategist at Nordea Asset Management, in a research note entitled “Little taper tantrum.”
Japan 10 year – click to enlarge
German 10 year – click to enlarge
Inflation-Protected Bonds ETFs
Inflation-Protect Bonds ETFs offer investors exposure to both U.S. and international inflation-protected debt. The majority of these funds invest in Treasury inflation-protected securities (TIPS), which are U.S. treasury securities that are indexed to the Consumer Price Index (CPI).
The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. Because TIPs are tied to CPI, many investors feel they aren’t what they’re cracked up to be.
Gold Silver and Commodities as a Hedge
We’re more interested in gold and silver, commodities and REITs for hedges at the present time. The trends are underway, so our straategy is buying the dip to the rising 9/21d in the short term.
Futures are off by more than 55 handles as we head into the opening bell. We’ll stick with our hedges for the time being.
Join us today in the trading room for our LIVESTREAM broadcast during market hours, as we navigate the current environment. Watch, listen, and trade from 9:20 AM to 4:15 PM Monday through Friday.
Happy Trading,
Vinny
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