BY: HANS ALBRECHT, CIM®, FCSI, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS
October 5, 2018
The U.S. economy is firing on all cylinders. Earnings have been terrific. Unemployment is low and jobs are actually in short supply for the first time in many years. Amazon just announced higher wages, complementing a higher minimum wage in the U.S. and Canada. Tariffs will be inflationary and GDP is finally above potential – we may very well see more serious signs of inflation in the next year.
This reality set in on October 3rd as bonds buckled and yields soared. U.S. 30-year and 10-year yields hit their highest levels since 2014 and 2011, respectively. For advisors who don’t think duration is a risk, think again! I’ve been talking about these issues at investment conferences throughout this year. Rate normalization is happening whether investors like it or not. The Federal Reserve’s glass is half full here, as compared to almost a decade of seeing it as half empty – and it doesn’t want to fall behind the ‘dots’, which means it will err on side of healthy rate hikes.
If wage growth is taking off, the Federal Reserve is not going to mess around – rates will continue to rise steadily. Bond short positions have been massive this year, but so far, they’re correct. Will rate volatility (bonds) spill over into equities? Perhaps ‘yes’ if this keeps up. As a result, momentum could play into both bonds and equities selling-off as risk parity trades unwind. However, larger selloffs should still be bought, as I still believe equities are ‘the place to be’ as earnings results improve.
Either way, we’ll likely get better premiums in our Horizons ETFs suite of covered call ETFs – and that is welcome news. The economic cycle mature phase is upon us, and solid large-cap companies are a great way to stay involved. The ride could be a bit bumpy, but covered calls are a great way to stay invested with the potential for added income and lower volatility.
10-Year Yield
Source: Bloomberg, as at October 4, 2018.
Source: National Bank, as at October 2, 2018.
The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.