(New York)

Right now might not seem like the most important time to buy rate-hedged or short duration funds. The Fed is supposed to be on “pause” after all. However, in our view, now might be a critical time to have some rate hedged assets in the portfolio. The reason why is that yields have pulled back strongly from just a couple of months ago, including yesterday, but given the fact that it is almost purely the Fed which has caused the sharp reversal, rates could swing just as wildly higher if their comments, or economic data, changes. In other words, the bond market looks overbought right now because of Fed comments, but it could easily snap back to where it was in December in violent fashion.

FINSUM: We think this is a time for caution on rates and yields given how strongly the market has reversed over the last couple of months.

(New York)

The high end of the real estate market is faltering, and banks are feeling it acutely. So-called jumbo mortgages, or those outside of Fannie and Freddie backing, have been shrinking recently. In a sign of caution from rich home buyers, issuance of jumbo mortgages fell 12% last year and were off 27% from their post-Crisis peak a couple of years ago. That compares to just a 7% decline in normal mortgages last year. Jumbo mortgages dominate some cities. For instance, 61% of mortgages in Manhattan qualify as such. Banks are feeling the sting as jumbo mortgages have been a big profit center for them in recent years.

FINSUM: The housing market is slowing in all areas. The big question is whether this is a leading indicator of a recession, or just an isolated asset-level downturn.

(New York)

Bloomberg has put out a very bearish article on the economy. The publication is arguing that there is a 2/3 chance of a recession beginning this year, and that a bear market is likely to happen alongside it. As evidence of the pending downturn, the article cites these as indicators: the nearly inverted yield curve, the big fall in stocks in Q4, weak housing activity, terrible February payrolls, and the fact that the rest of the world is slowing. One of the most acute worries though is that the Fed will keep hiking as part of an effort to leave itself room to cut rates in the next recession, an action which could drive the economy into a recession.

FINSUM: Again, much of the direction of assets and the economy depends on the Fed’s mindset. If the central bank returns to hiking, a recession looks like a sure thing. But if not, it is far from certain.

(New York)

There are a lot of good reasons to own Treasuries right now, and a lot of reason to be nervous about them. Let’s take a look. The biggest risks in the market at present are mostly about the budget deficit, which makes Treasuries look weak and inflation likely to jump (as it has historically during such spending). However, there are a lot of positives too. The big one is that the Fed looks ever more likely to adopt a permanently dovish stance as it may be changing its thinking about inflation. Additionally, economic weakness will be bullish for Treasuries, so coming to the end of the cycle is not catastrophic.

FINSUM: The best place to be on the yield curve is clearly at the short end—less rate risk and decent yields.

(New York)

Picking small caps is an art, a point that any serious investor in the space knows. Well, one of the best in the business is giving out tips today and advisors would be wise to listen. Samantha Lau, co-CIO of AllianceBernstein’s AB Small Cap Growth Portfolio is giving out her “rules” for small cap investing. Her fund has an admirable record, rising an average of 20% per year for the last decade, better than 95% of her peers. Some of her rules: “If you think something is wrong, exit and revisit”, “CFOs don’t quit to spend more time with family”, they leave because they see better performance elsewhere or something bad is coming. She continued “A good company is not always a good stock”. Her team uses a rigorous methodology that mixes quantitative and qualitative factors.

FINSUM: These are great tips for any investor, but we are particularly fascinated by the comment about great companies not being great stocks. It is an interesting and underappreciated point.