Our conservative investment process provides the foundation for all of our money management decisions.
When the Fed’s monetary policy is too restrictive that typically brings about a bear market and recession. They do this by raising short-term interest rates above long-term interest rates, otherwise known as an inverted yield curve. An inverted yield curve has been the best predictor of a recession.
Historically, a recession caused by an inverted yield curve often leads to a bear market in stocks causing the stock market to fall more than 30%. We know that 95% of stocks fall during a bear market so preservation of capital becomes essential.
We monitor interest rates and inflation to help determine the level of interest rates. The Fed alters interest rates to try and keep inflation under control, therefore monitoring inflationary pressures is essential.
While we do not invest in commodities, we track them as they are a leading indicator of inflation. Rising commodity prices will often lead to rising inflationary pressures and signal the Fed may have to raise interest rates to keep inflation under control. This is potentially a bad time to be invested in stocks and bonds. Rising inflationary pressures lead to rising interest rates and falling inflationary pressures lead to falling interest rates. When interest rates and inflation are falling it is typically an excellent time to own stocks and bonds.