What’s Ahead:
- The stock market has helped investors inch closer to their goals in the past two years.
- New fears emerge after a strong equity bull run as volatility creeps back up.
- Professionally managed portfolios of Structured Notes offer a new layer of diversification for todayโs risk-conscious investors.
It has been a remarkable period for U.S. large-cap stocks since October of 2022. The S&P 500 achieved back-to-back years of 20%-plus returns with generally tame volatility. Todayโs environment features important risks, however. Inflation fears have resurfaced, and interest rates are back on the rise, ironically following the Federal Reserveโs half-point rate cut back in September of 2024. Whatโs more, the so-called Treasury term premium has risen to multi-year highs, indicating a growing concern regarding the health of the federal governmentโs financial situation.
Interest Rate Volatility Remains High
Source: TradingView
Amid the backdrop of a bull market in stocks, yields that have marched higher, and volatility that may stick around, opportunities present themselves in Structured Notes. Indeed, this set of macro conditions may favor diversifying not just between stocks and bonds, but into different vehicles as investors drive toward their financial goals.
Professionally Managed Structured Notes
The NewEdge Structured Note Income Portfolio (SNIP) holds a carefully curated selection of Structured Notes aimed at providing everyday investors with high-single-digit returns while keeping volatility in check. Todayโs technology has brought down costs in the Structured Note market, allowing retail investors access to what was once reserved for large, wealthy, and institutional clientele.
A strategy like SNIP โ one that capitalizes on tactical opportunities with an active approach, while spreading out maturity dates and issuer exposure โ is focused on yield. Retirees and those nearing retirement may find the portfolio attractive. But even beyond SNIP, individuals should be excited, not fearful, about market conditions compared to where things stood just a handful of years ago.
A New Era Demands New Portfolio Management Techniques
Look back to 2021, and investors faced rock-bottom interest rates with muted volatility. Sure, that was a lucrative macro backdrop for stocks (and the S&P 500 shot higher shortly after the worst of the COVID-19 pandemic), but there werenโt many strong options for risk-conscious investors. Treasury yields were near 0% in near-dated maturities, while even intermediate- and long-term government bonds offered a negative return after inflation. Of course, 2022 was downright awful for equities and fixed income, all while high inflation eroded a portfolioโs purchasing power.
Today, though the macro landscape is by no means a walk in the park, there are โrealโ yields to be had. Technology and expert portfolio managers can craft a Note portfolio that has the potential to deliver a compelling cash-flow stream via coupon-paying Notes, along with downside protection and favorable return targets. SNIP, for instance, implements a short-term strategy with Note maturities broadly in a two- to five-year window. So, if interest rates keep marching higher, the portfolio can reinvest in higher-yielding Notes depending on market conditions.
Positive Stock/Bond Correlation is Actually a Negative
A macro challenge right now is that, despite higher yields, there has been a flip in the stock/bond price relationship. It used to be that by owning a sizable bond-market sleeve, an investor could effectively buffer against sudden (and protracted) bouts of volatility in the stock market; bonds zigged as stocks zagged, so to speak.
Now, however, equities and Treasuries are up together (which is great) and down together (which is not great). Hence, diversification into other investment vehicles may be prudent. Structured Notes may help steady overall portfolio returns, along with aiding investors in sticking with an overarching strategy when fear seeps into the stock and bond markets.
Health Check: Indicators Say the Vital Signs Are Strong
Another consideration for investors in Notes is that the health of corporate issuers appears robust. Debt levels are generally modest compared to equity levels, and regulators keep a close watch on how banks and other financial institutions manage their books. We never know what the future holds, but current and prospective investors in Structured Notes should be optimistic that credit risk is low today.
Look no further than the compressed interest rate differential between Treasuries and both high-grade and speculative corporate bonds; in the face of todayโs macro worries, financial-market indicators suggest that companies are in solid shape.
The Bottom Line
It has been a remarkable stretch for risk assets like stocks. The S&P 500 has put on a show over the past two-plus years, led by the intrigue of AI and new technologies. Bonds endured a steep bear market in 2021 and 2022, but todayโs interest rates bring about new hope for income-focused investors. With volatility perking up once again, the macro recipe could be in place for Structured Notes.
Sources:
- https://www.bloomberg.com/news/articles/2024-10-23/surge-in-treasury-term-premium-warns-of-rising-bond-risks
- https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-bank-balance-sheets-show-signs-of-strengthening-in-q3-2024-86219458
- https://fred.stlouisfed.org/series/BAMLC0A0CM
https://fred.stlouisfed.org/series/BAMLH0A0HYM2
Please see our Halo Disclosure Page for important disclosures
An investment in Structured Notes may not be suitable for all investors. These investments involve substantial risks. The appropriateness of a particular investment or strategy will depend on an investorโs individual circumstances and objectives.
Content and any tools discussed are provided for educational and informational purposes only. Halo Investing makes no investment recommendations and does not provide financial, tax, or legal advice. Any structured product or financial security discussed is for illustrative purposes only and is not intended to portray a recommendation to buy or sell a particular product or service.
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