Investors adapt to lingering inflation: Wealth managers see opportunities amid uncertainty

As inflation persists in the US, hopes for Federal Reserve rate cuts fade, leaving investors reconsidering strategies. Yet, amidst uncertainty, new opportunities arise. Financial advisers suggest seizing high Treasury yields before potential rate shifts. Rebalancing portfolios now, with tech stocks soaring, could mitigate risks. Surprisingly, long treasuries outyield stocks, prompting a cautious yet strategic approach. Additionally, stagnant mortgage rates offer potential benefits for aspiring homeowners amidst fluctuating real estate markets. Opportunity knocks, even in uncertain times.

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By Charlie Wells

Like a bad houseguest, hotter-than-expected inflation continues to linger in the US.

Traders had hoped by now the Federal Reserve would be free to start cutting interest rates — boosting rate-sensitive stocks and unlocking a largely frozen real estate market. Instead, stubborn price growth has some on Wall Street rethinking whether the central bank will lower rates at all this year.

But with the wait, come opportunities that investors thought were long gone. Several factors have aligned this month to give portfolios a series of second chances, according to financial advisers Bloomberg News spoke with. Here’s what they suggested.

Buying Time for Bonds

With interest rates higher for longer, there’s still time to lock in historically high yields on US Treasuries. Yields had dipped late last year on expectations Fed cuts would soon be coming on the back of strong economic data. But after the last few CPI reports, yields are back near last year’s peaks.

The policy-sensitive two-year note’s yield is hovering around 4.96%, up from 4.14% in January, and the 10-year yield is about 4.58%, up from 3.88% at the start of the year. The last time yields were in this ballpark for an extended period, George W. Bush was in the White House.

“This is your chance to lock in rates while they are still high,” said Jeremy Keil, a financial advisor at Keil Financial Partners in Milwaukee. “Thankfully you kind of got a few extra months.”

Rebalancing Chance

Now may also be the time to rebalance portfolios, especially with the outsized gains in the Magnificent Seven technology stocks.

The tech-heavy Nasdaq 100 is up about 33% in the past year, with chipmaker Nvidia Corp. gaining more than 200% on enthusiasm for AI stocks. And investors may want to check back in on their portfolios to ensure they’re not overweight any one stock or sector and underweight bonds.

Long Treasuries are, in fact, yielding more than stocks. For the first time in 22 years, the 10-year Treasury yield is higher than the S&P 500 earnings yield. Plus, the two-year yield is outperforming the S&P 500 dividend yield by the most since the dot-com bubble.

This does not mean all investors should make mass moves from equities to bonds. Younger investors, for instance, may need more risk exposure to grow their portfolios and have more time to recover from potential losses. What’s more, continued conflict in the Middle East could create the sort of uncertainty that introduces a lot of volatility. But at least for now, continued elevation in bond yields presents investors a chance to switch up their stock and bond mix.

“I don’t think there’s any one person that needs to be selling out,” said Christopher Cybulski of Chisholm Trail Financial Group in Austin. “But I’d say the people who are at the most risk are those that have concentrated positions.”

Real Estate Reality Check

Aspiring homeowners were also hoping this would be the year mortgage rates fall. But that isn’t shaping up to be the case, with rates topping 7% this month. Waiting can be frustrating, of course, but the current moment also offers a potential benefit.

“The other side of it is that we’ve seen rental prices come down,” Cybulski said.

Rent was a key part of the latest rise in inflation data. But that metric can skew the fact that real estate markets across the country are uneven, and in many cities rent has actually been falling. Taking advantage of declining rents could mean more savings, a higher deposit and a potentially lower mortgage rate for those waiting in the wings to buy a home.

“Everybody wants to keep up with the Joneses and own that beautiful piece of property,” Cybulski said. “It can become a nightmare if they have not thought through the long-term implications of rates and payments.”