The junk bond market is pricing in more pain / risk / growth deceleration while U.S. stocks are sanguine. Stocks behind the ball as usual?
A couple days ago I emailed a commentary about how I’m managing clients’ bond sleeves. As a brief refresher, I’m avoiding high yield / junk bonds and over-weighting Treasury bonds relative to investment-grade corporate bonds. That commentary was very high level focused on the historical performance of each segment during times of economic and market stress. Today, I’m going to get a little deeper into the weeds.
As discussed at length, I have significant concerns about U.S. stock market valuations and what that may portend for the next bear market. After all, the most reliable valuation metrics are indicating the U.S. stock market is more expensive than ever before (including 1929 and 2000).
Although valuations aren’t useful for short-term trading, valuations do provide insight into the potential severity of the next downturn. So whether the next bear market has already kicked off with the January 26th peak or starts 12 months from now, the key to understand is it will likely be commensurate with the extremity of current valuations (i.e. severe).
A couple proactive approaches I’ve offered for consideration to preserve financial independence is either (1) under-weight U.S. stocks in favor of other asset classes, including bonds, and/or (2) incorporate “put options” to insulate portfolios from a significant stock market decline. Today, I’ll focus on what I’m doing within the bond sleeve of portfolios I manage. Continue reading “How I’m Managing Bond Investments At This Stage in the Cycle”