Bond prices (like equities) have declined appreciably in 2022 so far in response to sharp increases in interest rates as central banks, particularly the U.S. Federal Reserve Bank (Fed), deploy “artillery” to wage war against inflation which has been exacerbated by the ongoing Russia-Ukraine conflict. Already in the four completed months of 2022, the benchmark U.S. 10-year treasury yield, for instance, has more than doubled its increase recorded in 2021.

Last week we discussed the Ostrich and Meerkat Effects. The Ostrich Effect refers to the idea that some investors metaphorically bury their heads in the sand to ignore or avoid negative news while the Meerkat Effect describes investors who display the opposite behavior. When faced with a crisis, such as a market crash, ostrich investors prefer to avoid the news while meerkats become hypervigilant- obsessively looking for news and information.

Close your eyes and imagine an ostrich. One of two images will most likely come to your mind- either an ostrich running (they are known for their speed after all) or an ostrich with its head buried in the sand. Interestingly when I was doing research for this article, I found out that the idea that ostriches stick their head in the sand to avoid predators is a myth. It seems ostriches stick their heads in the ground to dig a shallow hole, where they can subsequently make their nests. They do not do it to hide or when they are scared.

Red flags are traditionally used to signal danger. There are many red flags waving in front of us in our everyday life that we often ignore. This can be detrimental to our health and wealth such as when we feel unwell physically and ignore the signs of illness (red flags) to our peril, instead ending up at the doctor’s office where we are told to make significant lifestyle changes because if we do not, we may get gravely ill or die. Today we are looking at the red flags of investing.

Too good to be true

Problem description: Higher interest rates have negative implications for many asset classes, not just fixed income assets. Higher interest rates translate to lower equity valuations (and thus less “price appreciation” potential). Higher interest rates also increase the cost of debt for corporations. Higher interest expense = lower profit = potentially lower dividends to shareholders. Mortgage financing gets more expensive and thus housing becomes less affordable.

With great risk comes great reward is a quote famously attributed to Thomas Jefferson. An investor's risk tolerance is a very personal thing and their appetite for risk will change over time. 2022 has certainly begun with a bang and investors may be wondering what risks are necessary to achieve favourable rewards. This year investors are facing uncertain times where the only certainty seems to be market volatility. Currently there is geopolitical conflict with the war between Russia and Ukraine, many countries are fighting inflation along with central banks increasing interest rates.

This week saw the US Federal reserve increasing interest rates for the first time since 2018. This has been done to try to curb soaring inflation in the US. But what does this mean and how does this affect investors here in Jamaica?

February 24, 2022 will go down in infamy as the day Russia invaded Ukraine. In response, the West has never been more united in a coordinated effort to isolate and punish Russia for its so called “special military operation” in Ukraine. In a few short days, many countries have transitioned from the decades-long policy of trying to make peace with Russia to hitting it with sanctions the likes of which have never been seen before. They have frozen Russia’s foreign assets. They have removed many of its major banks from the Society for Worldwide Interbank Telecommunication (SWIFT) network.