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Stocks, bonds, and flight-to-quality


If you’re an investor or researching your first steps into investing, you’ve likely noticed the stock market (specifically the S&P 500) is almost literally flat. This is as of the writing of this article and for the last year period – going all the way back to January of 2018! Stocks were higher not too long ago; but as of last month, they’ve fallen sharply. In contrast, bonds have climbed tremendously in recent months. This has led many investors to use a “flight-to-quality” tactic and exchange their stocks for more government backed assets.

While it’s true that both stocks and bonds have made notable moves as of late, don’t be surprised if these trends reverse course!

Why the sudden divergence between stocks and bonds?  

You can probably imagine the tariffs on Chinese goods have not helped the stock market much (to say the least) nor have the recent talks of potential new tariffs on Mexican goods. It seemed that early in the year, a trade deal was close to being secured – only to unravel recently. This has been causing increased uncertainty and a subsequent drop in stocks.

Bonds, on the other hand, have been positively influenced by developments pertaining to the Federal Reserve. After increasing interest rates numerous times in 2018, it was a near certainty that the Fed would continue raising rates in 2019. This produced a negative outlook for bonds. However, the Fed has instead paused on any rate hikes which has surprised many investors. Some even think they may decrease rates once again. All in all, the bond market has surged on this assumption along with many other factors.

These factors together are what is driving some investors to feel fear and crave safety, ultimately leading to a “flight-to-quality” strategy. But is this for the best?

Use market moves to your advantage!

Markets tend to overreact in short periods of time – often in dramatic fashion – only to eventually return to normal. They then continue their longer-term trend. One never knows exactly when a reversal may occur, though. In other words: when stocks may rebound from their lows, and bonds decline from their short-term highs.

Continue to monitor your investments and be proactive in taking steps (today!) to use these market moves to your advantage, instead of being driven by greed or fear.

 

This column is sponsored by Allen & Company, and the opinions expressed herein may not reflect those of CFAN or of its advertisers.

BIO: Born and raised in the Central Florida area, Eric Greenhow strives for excellence — embodying the spirit and core values of Allen &
Company. He is nationally recognized for his industry leadership and community service, and is a Chartered Financial Analyst® and CFP®.
For more information about Eric and the Allen Investments Team, call 863.294.7411 or visit AllenInvestments.com/GoGreenhow.