How Long Will Rates Stay Elevated?

Biondo Investment Advisors CEO Joseph Biondo shares where he thinks opportunities are for investors and how long he thinks rates will stay elevated. Biondo also shares how markets will respond to the Fed’s expected ongoing hikes. 

How long do you think the Fed will keep rates elevated? 

While the Fed’s interest rate increases have begun to gain some traction in lowering inflation, progress is slow. In order to continue the downward trend, the rates will stay elevated for longer than the market participants believe. In our view, rates will likely remain elevated for the balance of 2023. If you look at the forward yield curve, markets are signaling that rates will ease about this time next year. The only way we see the Fed actually reducing rates is if they see the economy headed for a long, severe recession. 

The economy may be slowing but markets are improving – why do you think this is the case?

Since June, the S&P 500 has improved dramatically from a price perspective, even with the August lows. Certainly, this year, we have seen a positive trend being back above the 200-day moving average.

They say don’t fight the tape and a lot of the negativity out there is doing just that. The markets are trying to tell us something and we believe that message is a deep or protracted recession is unlikely. We believe that it is time to be constructive yet practical. Quality will matter and that is where we remain focused.

When do you think investors will start to feel like they can take on more risk? 

Not to sound overly cynical, but when investors feel like they can take more risk, this market run will probably be near its peak. At the same time, lower risk investors are finally finding rates that are attractive. While inflation remains elevated, harming real returns, savers are finally being rewarded with return on capital instead of return of capital, as it has been for several years in a low or no interest rate environment.

Going forward, how do you think the market will respond to the Fed raising rates given that they’re becoming more predictable and matching expectations? 

As with recent announcements, there may be increased volatility for a day or two around announcements, but the markets will take future moves fairly well in stride. I think too much can be made over one decision point. Also, the impact of future hikes on a higher base has a much more muted effect than where we were a year ago at the beginning of this cycle. Like all things now, the cycles move much faster than they did 10 or 20 years ago and longer.

Where are the opportunities for investors?

Last year, what performed really well were dividend paying stocks with reasonable valuations, slower growth and more economically sensitive type stocks. What underperformed was growth and we believe the tides are turning for them. Cyclicals like financials and banks have been acting great, technology is starting to get better, and energy has performed really well. We like secular growth companies. Historically we like them over time and valuations have become so much more attractive within the last year and are very compelling to us at this point.

In the long run, quality always leads and brings you through. The cornerstone of our investment philosophy is to buy quality companies run by good people and to try to do so with attractive valuations.  It helps us when others are more discerning and looking for quality because that’s where we are always invested.

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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