Risky business

Question: How should fixed-income investors be positioned in the current environment?

Donald Ellenberger: I think it makes sense to stay up in quality and probably down in duration, even though rates have risen a lot and spreads have widened a lot. Here's an interesting and I think a very powerful statistic. If you look at the correlation between the S&P 500 and the size of the Fed's balance sheet, over the past 12 years, it's 91%. So as the Fed's balance sheet grew through quantitative easing, stocks went up almost lockstep and remember, quantitative easing creates money, it does it out of thin air, and a lot of that money went into the stock market. But now we have the opposite of that. Now, we have quantitative tightening and quantitative tightening destroys money, and I don't think that could be good for risk assets.