Ken Moraif:
Hello, and welcome to our Market Alert video for today, which is May 3, 2024. Thank you for watching, we have a lot to get to we got the jobs numbers this morning, which came in bad, which was good news market like that. So we’ll explain that. Also, I’m going to be bringing on a guest today to talk with you about our bond portfolio, our Director of Investment Oversight, and that is Jordan Roach, and he’ll be kind of giving you the thought process behind our investment in bonds. We’ve been getting a lot of questions from our clients, you. And so we felt that maybe an explanation with some charts and visuals to make it even more interesting for you might help answer some of your questions. So I’m gonna just dive straight into that. So Jordan, if you want to join the call. There he is. Good morning. How are you?
Jordan Roach:
I’m great, Ken. I’m doing good.
KM:
Awesome. Awesome. So we’ve been getting questions, you know, we invested back in December into our bond portfolio. And one of the things that kind of prompted us to do that was that we felt that the Fed had reached peak interest rates, right, meaning that they had reached the highest level of the interest rate cycle that they’re going to raise to. And if that was the case, historically, we felt that that was a good time to be investing. Can Can you elaborate on that a little bit?
JR:
Yes. So you know, we had a lot of conversations October, November, December leading up to that decision of what we want to do. But ultimately, you know, back in December, our main thesis for why we put that position on went and rotated from cash into our core bond portfolio was effectively because, like you said, we just thought the Fed was done hiking rates. And we didn’t get in, because we thought that the Fed was gonna cut amount of times, or cut at a certain point, we just thought, effectively, they’re done raising rates. If that’s the case, then the risk reward dynamic of bonds relative to cash, we thought becomes very favorable. So we went ahead, we traded and we rotated into there. And then obviously, what we’d hoped is, we’d love that position to immediately go in our favor, right, immediately make money, which we actually did in the first couple of weeks. But since then, we’ve had a lot of volatility in the bond market. So one of our jobs, you know, with the Investment Oversight Committee is continually evaluate, are we in the right things? And as make sure the reasons that we’re in a trade or we’re in a position, has anything changed. And so what I wanted to do, and I’ll share my screen here, is just look back at prior cycles that might have been similar to this and see what can we expect going forward? And so what we’re looking at here, is the last four times the Fed has actively been hiking rates, okay. And so we’ve seen that happen in the mid 90s, in the early aughts, the mid aughts. 2018 19, like we talked about our video in December, and obviously recently, so what we did is kind of embark and look at some research here to see once the Fed has basically signaled that they’re done hiking rates, and they actually are done hiking rates, how do bonds perform relative or our types of bonds that we’re in core bonds relative to maybe ultra short bonds, or cash, and that can hopefully give us some perspective on what we might expect going forward. So we kind of go across this chart here. And again, in the mid 90s, what we’re looking at is the Fed stopped raising rates in February 1995. And then what we’ve done is we start the clock six months after that at that last hike, and then evaluate how do different parts of the fixed income market perform relative to each other. And the reason we look at six months after the last hike is there’s usually some repositioning, once the Fed signals they’re done, just like we’re seeing right now. And so if we look at that and say, Okay, how did core bonds do in the in the 12 months following, you know, a Fed hike? Well, core bonds are up five and a half percent, at that same period of time short term bonds, which, generally speaking are less risky than the core bonds that we’re looking at. We’re up five, so similar performance, and actually money markets or cash was up 5.1. So really, in that scenario, anyway, you went, you did pretty well, but bonds outperformed the other two asset classes.
KM:
And so what we saw here is that the Fed they they lowered the interest rates, but it was a tie between money markets, short term bonds, long term bonds that kind of was in that scenario was a tie. so no harm no foul in that situation.
JR:
That’s right. That’s exactly right. Again, you know, the important thing here, and we’re seeing this kind of dynamic now is this is looking at a 12 month cycle. So obviously the ride, you know, month to month inside of that 12 month cycle can look differently but if you just say Start Here finish here, you look up, effectively a tie between those types of those types of investments.
KM:
And now I’m liking what I see what happened in, in the in the 2000. That looks a lot more favorable.
JR:
So 2000 was real interesting. This is a big divergence. So you have May of 2000, the Fed stopped raising rates, you look six months later, and then evaluate, you know, a 12 month period. And core bonds did very well relative to the other. So core bonds up 12, short term bonds up nine. And then money markets really are lagging at that point. So in that scenario, and that cycle, you are absolutely paid to go ahead and rotate into bonds, that’s a big difference.
KM:
And our portfolio, the BK AG, we call it BKAG. That’s kind of more related to that 12.3 number than it is to 9.2, or the money market fund, right?
JR:
Yes, that’s right. So it’s very important here, when looking back is we want to compare things similar to what we would be in today. And so that core bond portfolio, those types of bonds are the exact type of bonds in general, that we would have in BKAG, which is, which is our bond portfolio. Exactly. Right. Yeah. Yeah. And so you know, you continue on you go, you know, six, you know they stopped, and then you have bonds are up 6.6%, short term bonds up four money, markets actually did a little bit better to short term bonds, but again, core bonds outperformed in that cycle. Yeah. And then the one we really talked about a lot leading up to December decision was what was going on, in 18. And through 19. And so in that period, core bonds, again, up 8.9, short term bonds up 2.9, money markets only up one. So again, a massive, massive difference there. So you’re really paid to go ahead and move in quickly into the bond market.
KM:
And so and so this is all showing the Feds first change in the way they decided to drop interest rates. And then six months later, what the result was right.
JR:
So yeah, so it’s not even in that case. So similar. So it’s not even the Fed. It’s actually the Fed not even bringing rates down. It’s the Fed just doing what they’ve just done, which is to say we’re done raising, right.
KM:
Oh, so this is just peak interest rates. Okay,
JR:
This is just peak interest rates, that should just That’s right. That’s exactly right. And so that’s where we think we are. So technically, you know, the Fed the last time the Fed actually brought rates up, was in July of 23, almost a year ago, that was the last time rates pushed up one more time was a quarter percent raise, that was the last time since then, at every meeting, the Fed has just been holding rates at that level. And so we’re looking again, we fast forward six months, we look at January of this year and say what’s going to happen this year in the bond market? Well, we don’t know, right? We don’t know. But if we look at the last four times this has happened, it could give us a good indication of what might happen. And that’s what leads us to say I still think bonds are a good trade a good position to be in relative to more conservative investments that we could have been in.
KM:
So if we look at the average there at the bottom of that chart on the right, what it says there is that the average over the last four times when the Fed stopped raising interest rates, which is the environment it appears that we are in now, the average return on the core bond is 8%. Versus cash money markets, which is four, which is why we decided okay, if they’re done raising interest rates, you know, history tells us it’s a pretty good idea to be in bonds rather than in cash.
JR:
That’s right. We don’t know when right, that’s gonna happen. We don’t know when the Feds gonna cut if we did, but we just use this to say, if we think they’re just done raising, we like bonds over cash. That’s exactly right.
KM:
There he is. So thank you for your time today. And ladies and gentlemen, thank you for watching this longer than normal video. But we thought we wanted to answer your questions about the bond market so I hope that answered your questions if you have any other questions please talk to your retirement.

Please note: transcript has been modified after the time of recording. 

Economic indicators and stock market performance cannot be predicted. Opinions expressed regarding the economy and the stock market belong solely to Ken Moraif on behalf of Retirement Planners of America and may not accurately portray actual future performance of the economy or stock market outcomes. Opinions expressed in this video is intended to be for informational purposes only and is not intended to be used as investment advice for individuals who are not clients of Retirement Planners of America. All content provided is the opinion of Ken Moraif, CEO and Founder of RPOA Advisors, Inc. (d/b/a Retirement Planners of America ) (“Retirement Planners of America”, “RPOA”). ©Copyright 2023