Wall Street clung to optimism in August despite a growing number of skeletons in the world’s geopolitical closet, any one of which has the potential to spill out and send the markets tumbling with it. Will it happen this Fall? I’m sure you’re aware of the skeletons I’m referring to. One, of course, is the increasing threat of Covid-19 variants. In some areas of the U.S., hospitalization and infection numbers are now higher than they’ve been at any time during the pandemic.* If the trend continues, could it lead to a de facto economic shutdown where people are simply afraid to go out? Or could we see another rising threat—terrorism—worsen to the point where many Americans are afraid to go out? We’ve already seen one terrorist attack kill American soldiers in Afghanistan. Will the situation worsen and, if so, will it shake up the markets?
In addition to all this, we also have the delicate state of the economic recovery itself. So far this year, that has been the only issue to cause any real stock market volatility—especially the threat of inflation. However, even that volatility was fleeting, and the market has hit numerous new record highs. Will that trend continue, or will the Fed undo it by mistiming its next big move? If it raises short-term rates or unwinds quantitative easing too early, that could send us back into a recession. If it waits too long, inflation could worsen. Either scenario could send the markets reeling.
No one knows for sure what will happen, but there are some important things to keep in mind. One is that for all the stubborn optimism of the stock market, the bond market tells a different story. After rising steadily early this year, the yield on the 10-Year Treasury rate leveled off this spring and has trended mostly downward ever since.** In other words, the bond market has appeared much less optimistic than the stock market for most of the year, and it remains that way as we head into Fall.
Here’s one more good thing to remember about Fall: it’s back-to-school season. It’s time to get serious again, and that means getting serious about your finances, especially if you’ve taken a break from thinking about them all Summer. That break hasn’t cost you anything because the markets have cooperated, but that situation could change quickly in the months ahead. In light of that, are you still comfortable with your allocation? Has your risk tolerance changed? These are just some of the important questions to make sure you can answer as back-to-school season begins!
When managing your portfolio at SIS, we look for one of four possible “enhancement” trades while reviewing securities and possible transactions. Income generation is our primary goal for our clients, and we consider the following four portfolio enhancements before transacting: current yield, yield to worst (minimum projected annualized total return), interest rate risk, and default risk. The intents of these transactions are categorized as follows:
- Pay Me Now – Enhancing current yield
- Pay Me Later – Enhancing yield to worst
- Cover My Assets I. – Managing interest rate risk
- Cover My Assets II. – Managing default risk
We evaluate the transactions by determining whether they meet one, two, three, or all four enhancements. A baseball analogy for this: SINGLES, DOUBLES, TRIPLES, and HOME RUNS.
We have one swap to report for August.
- We sold KSS 4.25% 07/17/2025 @ $109.17 / 1.65% ytw
- We purchased CMC 02/15/2031 @ $101.25 / 3.68% ytw
*“In Florida, the Pandemic is Worse Now Than it Has Ever Been Before,” New York Times, Aug. 26, 2021
Note: The above trades were recent block trades and do not reflect all trades done on an individual specific basis. Sound Income Strategies, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not an indication of future results. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein.
You are advised to give independent consideration to, and conduct independent investigation with regards to the information above in accordance with your individual investment objectives. Use of the Information is at the reader’s risk, is strictly intended for informational purposes in conjunction with the recipient’s due diligence, and should not be construed as a solicitation by Sound Income Strategies, LLC. Past performance will never indicate or guarantee future behavior. Sound Income Strategies, LLC does not represent or warrant that the contents of the document are suitable for you from compliance, regulatory, legal, or any other perspective. We shall have no responsibility or liability for your use or non-use of the document or any portion thereof.
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