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Over the fourth quarter of 2022, the LOM Stable Income Fund rose 6.07% despite a selloff in
hybrid securities as equity markets rebounded and investors continued to favor higher dividend-paying
stocks.
Responding to the Federal Reserve’s almost unprecedented barrage of restrictive monetary
policies during the course of 2022, stock and bond prices mostly slid throughout the year. Fed
policy initiatives included seven large interest rate hikes, quantitative tightening and an historic
shrinking of the money supply as defined by M2.
In 2002, Fed Reserve chairman, Jerome Powell clearly pivoted from being overly dovish to
extremely hawkish in his approach. Now operating in damage control mode, Powell is attempting
to rescue his reputation following one of the worst monetary policy errors in central banking
history.
In Q4, the Treasury yield curve has become increasingly inverted as investors forecast rates to
peak soon. Short-term Treasuries below two years have risen higher, while longer term rates as
measured by the ten-year bond remained essentially unchanged throughout the quarter. Credit
spreads tightened somewhat on investment grade bonds, with the spread between US BBB
corporates and the 10-year Treasury narrowing by about 40 basis points.
The FOMC committee increased its policy rate by 0.75% in the November meeting, then 0.5% in
the December meeting. In December, Powell indicated that the Fed Fund terminal rate will likely
be around 5.1%, up from the 4.6% estimate back in September. According to the FOMC dot plot,
which is a survey of FOMC members’ dot projections, rates will keep moving higher next year, but
will shift lower in 2024. On the other hand, the futures market has priced in a slight rate cut later
this year.
Closing out the end of the year, the Fund was allocated 63% in high dividend-paying equities,
4% fixed income and 29% hybrid securities, including preferred stock and $25 par notes. We
continue to use our investment discipline to uncover value and yield against the backdrop of a
highly volatile market and weakening economic conditions.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
