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Financial markets are still recovering from the invasion of Ukraine. Volatility remains high in the broad stock market, although the S&P 500 has recovered most of its lost ground. At the time of writing the broad stock index was at 4575.52, still down 4% from the beginning of the year.
Some alternative assets have out-performed traditional markets. Bitcoin is up YTD by 4.2%, and in the past month has gained 10.3%. Gold has also had a good run over the past month despite declining fears of an escalation in the Ukraine war. Gold has increased 0.5% over the past month and is still up 4.7% YTD.
Inflation continues to be a concern, with the latest data from the Bureau of Statistics showing inflation increasing by 7.9% on a yearly basis. Crude oil prices continue to remain high with WTI crude well above $105 a barrel. Energy and commodity prices seem to be the main factors driving inflation.
If the economy can continue to grow at a high enough pace, inflation may not impact the stock market so drastically. In either case, companies with large debt-to-equity ratios will be highly affected when interest rates rise, as they will have to pay more to finance their debt.
Investors in the bond market are anticipating higher interest rates are just around the corner. As inflation continues rising the Federal Reserve will find itself obligated to increase interest rates. Higher interest rates are the main concern for bondholders as their current assets will be worth less.
However, the steepness of a treasury yield curve also tells us of things that are yet to come. The current yield for 5-year Treasury notes went higher than that of 30-year Treasury bonds for the first time since 2006.
Source: St. Louis Fed
Higher short-term yields compared to long-term yields are known as an inverted curve. This characteristic can tell us a lot about what the bond market is expecting. The chart above shows the bond yield for 5-year notes and 30-year bonds, along with the Federal Reserve funding rate.
As mentioned before, higher short-term yields indicate that bondholders fear much higher interest rates in the near future. However, we can see in the chart above that most of the time the yield curve inverted, the US economy subsequently headed into a recession.
There is no guarantee that past behavior will tell us what will happen now. But the financial markets, just like history, tend to repeat themselves.
Alternative assets like gold and Bitcoin are not strongly correlated to stock markets. And most importantly, are positively correlated with inflation.
Gold has been known for its characteristic of increasing in price along with inflation. Bitcoin is a newer creation but has, so far, also shown signs of impartiality, at least to inflation.
The geopolitical tensions created by the Russian invasion of Ukraine, and the persistent rise in inflation, are designing a perfect storm. Portfolio diversification can help alleviate the pitfalls of only investing in traditional assets like stocks and bonds.
To invest in alternative assets, you would need to open a Self-Directed IRA. If you are thinking of investing in cryptocurrencies, in particular, several companies offer specialized services for cryptocurrency assets. You can read more about them in our review of the Top 5 Crypto IRA Companies.
Gino D'Alessio is a Broker/Dealer with over twenty years experience in various OTC markets such as Bonds, FX and Derivatives. Currently a Financial Markets and Investments Writer & Analyst
