Despite the instability of the American economy in recent years, the price of electricity has remained relatively stable. In contrast, the price of gasoline has recently skyrocketed due to a decrease in supply and other global factors, including the war in Europe. There are several reasons for this discrepancy. First, electricity is produced primarily from domestic energy sources, such as coal and natural gas. In contrast, gasoline is derived from crude oil, which is a global commodity subject to the vagaries of international markets.
Additionally, the United States has made significant investments in energy efficiency, which has helped offset increases in the cost of electricity production. Finally, electricity prices are regulated by state utility commissions, while global market forces determine gasoline prices. As a result, electricity prices have remained relatively stable throughout the United States, even as gasoline has become much more expensive. One of the key takeaways from the recent gas increases to over $4 as a national average, many consumers are now weighing the pros and cons of keeping their gas cars or transitioning to electric.
According to a study by CNBC, electric vehicles are unlikely to cost more to operate than their internal combustion counterparts since their energy cost per 100 miles is significantly less than the gallons of gasoline used by gas motors. As the price of gas is predicted to drop over the next few months as supply catches up with demand, analysts will keep a close eye on the relationship between the auto and energy markets.
Navigating Portfolios through Market Contractions
Many analysts believe that we are in the late stage of the economic cycle, and many top financial institutions are pontificating on the best financial strategies.
Regardless of market conditions, there is no one size fits all approach that works best for every portfolio, and market hype does an excellent job of causing well-intentioned investors to abandon their discipline and hop on trendy investments, “recession-proof stocks” or several other securities that ultimately do not belong in their portfolio.
A market downturn can be a difficult time for investors as they watch the value of their portfolios decline. However, investors can employ different financial strategies to weather the storm. A young person who is still accumulating wealth may have a higher risk tolerance and be able to weather more volatility. During a market downturn, they may even be able to take advantage of lower prices to scoop up bargains.
Someone in the middle of their career may want to focus on mitigating risk. They may choose to shift some of their portfolios into more stable investments, such as bonds, to ride out the turbulence.
And someone who is close to retirement may need to focus on generating income from their portfolio rather than accumulating more wealth. They may choose investments that provide regular payouts, such as dividend-paying stocks or bond funds.\
The most important factor in navigating market swings is to keep working towards the financial goals you and your advisor set out, so you are prepared regardless of market conditions.
Fixed Income is Still Here
Most investors understand that rising interest rates result in lower bond prices. Still, many don’t understand what to do with their fixed income portfolios in a rising rate environment.
As interest rates begin to rise, fixed-income investors may be concerned about the impact on their portfolios. However, some steps can be taken to mitigate the effects of rising rates. One way to do this is to diversify your portfolio by including assets such as floating-rate securities. These securities tend to perform well in a rising rate environment, as the coupon payments adjust along with rates. Another option is to ladder your bonds, which involves investing in bonds with different maturity dates. This helps to reduce the interest rate risk of your portfolio, as shorter-term bonds will mature and can be reinvested at higher rates while longer-term bonds continue to provide stability.
Remember, fixed income securities play an essential role in a long-term financial plan. When properly selected and managed, they can provide several benefits, including stability, income, and diversification – even in a rising rate environment.
- Stability: Fixed income securities are generally less volatile than stocks, making them ideal for investors seeking to preserve capital.
- Income: Interest payments from fixed-income securities can provide a source of regular income, which can be especially helpful in retirement.
- Diversification: Fixed income securities tend to move in different directions than stocks, making them essential for diversifying a portfolio. By including both stocks and bonds in a portfolio, investors can help to reduce overall risk while still achieving their desired level of return.
The graph below shows the relationship between bond prices and rate hikes over the last 30 years which provides a clear visual of how prices move in tandem with rates:
New On Lake Street
The Lake Street team has a few new faces this month! Erik Gutierrez joined Lake Street as our newest Private Wealth Advisor. He has an extensive background in engineering and working with complex derivatives in the financial markets.
We are also welcoming two interns this summer, Jack Luzzo and Cade Zrelak. Jack and Cade will be seniors this fall at Indiana University, and both are pursuing a degree in finance. During their internship, they will be learning about financial planning and portfolio construction. We are excited to have them join us this summer!
Articles We’re Reading
Saudi Arabia is increasing supply. Why is the oil price holding firm? … (link)
JetBlue And Frontier Boost ‘Wedding Insurance’ Ahead Of Spirit Shareholder Vote…(link)
Bipartisan crypto regulatory overhaul would treat most digital assets as commodities under CFTC oversight .… (link)
For Americans behind on saving for retirement, a bad stock market can be a good time to invest more … (link)
For the Month Ending 5/31/2022 (Cumulative Returns)1
1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
Did You Know?
On June 6, 1944–celebrated as “D-Day”–the Allies began a massive invasion of Europe, landing 156,000 British, Canadian, and American soldiers on the beaches of Normandy, France. The D-Day invasion was a turning point in World War II, marking the beginning of the Allies’ push to defeat Nazi Germany.
The invasion, codenamed Operation Neptune and commonly known as D-Day, was the largest amphibious assault in history. The success of the invasion depended on careful planning and execution; if any element of the plan had gone wrong, the Allies would have suffered a devastating defeat.
The invading force faced fierce resistance from German forces but ultimately succeeded in establishing a foothold in Europe. In the months that followed, Allied forces continued to push eastward, liberate concentration camps, and liberate cities occupied by the Nazis. By May 1945, Germany had surrendered and the war in Europe was over. The D-Day invasion was an essential step in the Allies’ ultimate victory.
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.