Where are we in the economic growth cycle and what risks are the most pressing?

Let’s talk about the curious dynamic of growth and inflation. Inflation tends to be bad for interest rates and for the equity markets in general. It’s a little bit of a conundrum sometimes when growth gets too hot and creates inflation.

We’ve been growing now for quite some time. There’s a bull market, we’re still in it, and it’s been 10 years long.

How should be thinking about interest rate risk vs. credit risk vs. equity risk?

The risks that are we are observing

We’ve had a long growth cycle, from no growth at all in 2008 and 2009, and that being said, if we’re not at the end of it we’re certainly approaching the end of growth from an economic perspective. Different risks pertain at different points in the cycle

As rates have moved up a bit, fixed income becomes more attractive especially to our retail clients. For retirees or for those close to retiring, they’re really looking forward to getting income from their portfolios, something that disappeared for almost 10 years.

Now with that being said, another issue comes to the forefront. What credits do you buy if you are buying fixed income? We buy Treasuries, as apparently there is low risk in investing in credits of the US government, but the yields are substantially lower.

So you go and look at corporates or perhaps municipal markets. It’s imperative that at this point we look closely at the credit risk they carry. If clients own individual bonds with a sound credit rating, volatility is less concerning. For lower rated credits, an economic slowdown may be making you a little nervous.

These things become very worrisome at times, and we can only suggest to our clients on the retail side that it’s really about credit risk at this time in the fixed income markets.

Where are we in the equity markets? We’re in the late cycle portion of our growth market.

Cash, the forgotten asset class

What about cash? It’s the four letter dirty word that nobody uses in our business anymore. Cash is an asset class that at all times is essential and at all times important to portfolio structure.

Actually today we’re getting some kind of return on our cash holdings. There were years when we got zero thanks to our lovely Federal Reserve Bank. That being said, cash is an important asset class and don’t dismiss it!

Greg Silberman, CIO, gsilberman@acgwealth.com

David Crook, Global Economist, dcrook@acgwealth.com

This material is provided for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The views and strategies described may not be suitable for all investors. They also do not include all fees or expenses that may be incurred by investing in specific products. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. You cannot invest directly in an index. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. The opinions expressed are subject to change as subsequent conditions vary. Advisory services offered through ACG Wealth Inc.