Houston, We Have a Problem – Well Maybe Two Problems

Douglas Cote

Douglas Coté, CFA

Senior Portfolio Manager, Head of Global Perspectives

Houston’s biggest problem this week has been lack of energy. Come again? How is it that a mega oil-rich region has an energy problem? Like the rest of Texas, Houston lost electric service when the State power grid shut down on Monday, in the grip of a rare cold snap. Some were quick to blame the loss of power on windmills that iced up, but windmills supply only 10% of Texas’ winter capacity; frozen pipes at gas- and coal-fired generation plants took a much larger toll on the electricity supply. The Texas grid didn’t fail because it lacked diversity among its energy sources, it failed because Texas wasn’t prepared for cold weather. This is a different sort of non-diversification, which can sometimes affect investment portfolio planning: failure to take into account the full range of possibilities that might affect outcomes.

The other problem actually is not in Houston, but the catch phrase seemed appropriate. The problem is skyrocketing interest rates. What do you mean? The fed funds rate has not changed from the 0.00–0.25% range. Well, it is a funny thing that the market didn’t get the Federal Reserve’s memo. The yield on the ten-year U.S. Treasury has gone up nearly 50% YTD, from a yield of 0.87% on 12/31/2020 to a high point of over 1.31% this week! Expectations for low rates were already priced in and now the market seems a little on edge, especially growth stocks that are more severely impacted by a rising discount rate. Meanwhile, the U.S. dollar is dropping and oil prices are rising, stoking inflation expectations. If the ten-year yield hits 1.50%, expect pronounced volatility.

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