As just about every market analyst and business news outlet in the world has been pointing out, interest rates are finally on the rise. Perhaps the best indication of this—aside from the Federal Reserve’s five consecutive hikes of the Prime Rate in the past 18 months—is the fact that even yields from 10-year Treasury notes have been steadily increasing for over 2 years now. Analysis suggests that rates will continue to increase steadily in the foreseeable future.
The general public has taken notice. While refinances are down nearly 40% from their volume this time last year, mortgage applications are up 4% year over year. 30-year rates have risen accordingly, hitting 4.88% for conforming loan balances. The steady increase may help to fuel home buying, despite high prices and limited supply.
Investors are reacting by reallocating their portfolios—or at least they should be.
Equities have been on a hot streak for nearly a decade and seem poised for a correction, or at least for returns to slow significantly. The S&P 500 has seen an increase of 335% from the lows of the recession. However, the perception is growing that stocks and bonds are overvalued, driven in part by debt-driven spending. In the short term, Wall Street anticipates a 5% pullback in the stock market. Citigroup analysts have noted that one of their models indicates a 70% chance that stock prices will be lower 12 months from now.
Investors should strongly consider a shift in investment strategy. While some might think that the obvious play is to chase higher yields, caution is advised. Because of market appreciation in real estate, there’s a significant risk for a correction.
Fixed-income opportunities—such as investing in mortgage pools—represent a relatively low-risk way to take advantage of the still-growing market, while hedging against future downturns.
There’s also an argument to be made for taking investment funds off the table for the time being.
Mark Cuban made a splash on September 10th—while also reinforcing the reservations of many investors—in an interview on Fast Money Halftime Report on CNBC. When asked if he owns shares in Twitter, he stated that he had sold off all of his holdings in the social media company. But not, he cautioned, due to concerns about the company, but rather because “I wanted to accumulate as much cash as possible.” In fact, Cuban noted that he has largely pulled out of the markets:
I’ve got a whole lot of cash on the sidelines. There’s just, there’s no way where you can just say, “I just trust everything that’s going on.” And that concerns me. Put aside tariffs and put aside what the president is doing, he’s got his reasons, but… I just think we borrowed from the future to kind of pump up the current market… At some point, that’s going to come due. I don’t know when the market will start to recognize that, and that’s my biggest concern.
Cuban may well be right in saying that now is a good time to start easing out of higher risk investments into cash and wait for prime investment opportunities to present themselves. There is still a large supply of money in the markets. However, rising interest rates are gradually turning off the tap. If your higher yield investments are not appropriate for the current economic environment, then it may be time to go cash.
If you’re an investor currently in the process of rebalancing your portfolio, and determining how best to allocate your funds, fixed-income investments like those offered by Socotra Capital are worth your consideration. To learn more, visit our accredited investor portal, contact us by calling 855-889-7626, or send us a message through our contact form.