Partners in Life Planning
(800) 358-0016

When Conservative Is Not So Conservative

The past quarter has been filler with a plethora of surprises, both domestically as well as internationally. A prolonged period of historically low interest rates has led the market into a feeling of precarious calm, with undertones of panic, although most won't admit it. It's been called the most hated Bull Run in the history of the market. As discussed in another article in Financial Visions, when you deal with the market, you learn the old adage, "there are positives and negatives to everything." The past quarter has seen the Dow and S&P rise very quickly, and then plummet within days- the cause being just an innuendo of fact which put the bond market into a quandary and sent it reeling.

First, let's address the fast rise in the general markets. With the extended period of low interest rates, the people most affected are those that depend on fixed income investments for their monthly income. With income diminished for an extended period of time, many people have decided (or felt forced) against their risk tolerance to invested in the fast moving market in the hopes of increasing their income potential. Unfortunately, as we know, the markets are as predictable as the tables of Las Vegas: and unfortunately, too many times, the house wins. Coupled with high unemployment and other economic instabilities, Fed Chairman Bernanke declared that he would not consider interest rate hikes until unemployment dropped to 6.5%, from its rate of 7.9% at the time of his statement. To infuse money into circulation, the Fed started a program of buying $85 billion dollars of Treasuries per month. The markets continued their slow but steady rise until June 19th, when it was insinuated at a Fed meeting that the 6.5% number may be be raised to 7.1%, and even more importantly, The Fed may start to taper off their bond buying program, known as quantitative easing (QE). Keep in mind that there was no definitive announcement, only a perception... and the markets roiled. We all know that interest rates will begin to rise eventually, and we think it will be sooner rather than later, but not severely or suddenly. The "insinuation" drove bond yields quickly and sharply upward, sending the market values of bonds into an unprecedented tailspin. Bernanke, now backpedaling, quickly stated that the 6.5% is a threshold, not a trigger, and a rise in rates would depend on many criteria. Nonetheless, the bond market reeled, and the equities market followed. Thus, regardless of position, just about all Americans saw a fast and severe drop to even the most conservative of portfolios. The Dow Jones Industrials benchmark saw close to a 1000 point drop in a short time. Mortgage rates, at an all time low, rose a full point in just days. The fear is that once the first official raise comes, it will begin the long trend of rising general rates and the first step toward a steady rise in short term interest rates.

The paradox is if the Fed does raise rates, those areas that have been doing well like automotive and construction may experience a slowdown, delaying an economic recovery. Studies show that Americans are once again dipping into savings to offset payroll tax implications which started earlier this year, causing everyone to bring homeless in their paychecks. Conversely, retail sales has risen moderately to 3.7% year over year, and consumer confidence has risen to its highest rate since November of 2012 due in part to low prices, home price appreciation, and recent market gains in their retirement plans. Where does that leave us? To some degree, in a considerable period of lack of direction. If the Fed can continue to hold interest rates down, the markets level out, consumer confidence continues to stay firm and unemployment continually moves down, perhaps things may stabilize. This unfortunately, doesn’t mean any of a thousand things can happen in the WORLD markets to send us reeling into another period of indecision and unpredictability. Don't shoot me...I'm only the messenger.

No Comments Yet.

Leave a comment