The Tug of War: Bonds vs Stocks

Ann Miller |

The S&P 500 index declined by 3.6% for the week, marking its steepest weekly drop since September 2024. Dow Jones Industrial Average: The Dow fell by 2.9%, weighed down by concerns over rising bond yields and fiscal policy uncertainties. Nasdaq Composite: The tech-heavy Nasdaq recorded a 4.1% loss, its worst weekly performance in recent months, as investors rotated out of growth stocks amid economic uncertainty.

 

Moody’s Ratings Service recently lowered the U.S. long-term credit rating from its top grade (AAA) to AA⁺. While this downgrade sends a cautionary signal to investors—that borrowing costs could rise over time—it does not mean that the United States will default on its obligations. Instead, Fitch’s decision highlights long-term concerns about fiscal management and governance that may lead to higher future borrowing costs if these issues are not addressed.

 

Another rating agency, Fitch downgraded the U.S. credit rating on August 1, 2023.

 

Keep in mind that your Affinity Capital Portfolios do not mimic the common market indices.

 

Throughout the second quarter, Affinity Capital has preserved cash and significantly increased our Bond allocation. Proper short-term cash management is an extremely valuable strategy in a volatile market. We have purchased numerous financially strong, defensive dividend stocks including those in the Consumer Staples, Finance and Healthcare sectors.

 

Impact on the Stock Market Increasing Bond Yields:

Note: The term "yield" is simply a financial industry term to describe “interest”.

  • A New Investment Rival: Stocks are one way to invest, but if bonds start offering higher returns due to rising yields, investors might prefer these safer income options over riskier stocks. When money shifts from stocks to bonds, stock prices might drop.

  • Valuing Future Earnings: Investors value stocks based on what a company will earn in the future. If bond yields increase, the extra money you can earn from bonds makes a company’s future earnings less attractive today. This can lead to lower stock prices because the present value of future profits is reduced.

Adjusting Strategies:

  1. Shifting from Stocks to Bonds:
    As bonds offer higher returns, professional money managers like Affinity Capital, may move money from stocks to bonds for a safer, steadier income.
  2. Diversification and Rebalancing:
    To manage the increased volatility, diversified portfolios are key. We balance investments between stocks and bonds and seek out sectors known for steady performance. This helps to cushion against sudden market swings.
  3. Focusing on Quality and Dividends:
    We are favoring companies with strong balance sheets and regular dividend payments. These companies can provide income even when market prices fluctuate, making them more appealing in a time of rising borrowing costs and market uncertainty.

Even during these uncertain times, it is important to stick with a long-term plan. We are here to help guide you through these changes. Our goal is to keep your money safe today and build a strong financial future for you and your family.


Thank you for trusting us as your financial partner.