Posts tagged ‘dot plot’

Cash Is Trash

The S&P 500 stock market index took a breather and ended its six-month winning streak, declining -4.8% for the month. Even after this brief pause, the S&P has registered a very respectable +14.7% gain for 2021, excluding dividends. Nevertheless, even though the major stock market indexes are roaming near all-time record highs, FUD remains rampant (Fear, Uncertainty, Doubt).

As the 10-Year Treasury Note yield has moved up to a still-paltry 1.5% level this month, the talking heads and peanut gallery bloggers are still fretting over the feared Federal Reserve looming “tapering”. More specifically, Jerome Powell, the Fed Chairman and the remainder of those on the FOMC (Federal Open Market Committee) are quickly approaching the decision to reduce monthly bond purchases (i.e., “tapering”). The so-called, quantitative easing (QE) program is currently running at about $120 billion per month, which was established with the aim to lower interest rates and stimulate the economy.  Now that the COVID recovery is well on its way, the Fed is effectively trying to decrease the size of the current, unruly punch-keg down to the volume of a more manageable punch bowl.

Stated differently, even when the arguably overly-stimulative current bond buying slows or stops, the Federal Funds Rate is still effectively set at 0% today, a level that still offers plenty of accommodative fuel to our economy. Although interest rates will not stay at 0% forever, many people forget that between 2008 and 2015, the Fed Funds Rate stubbornly stayed sticky at 0% (i.e., a full punch bowl) for seven years, even without any spike in inflation.

Because the economy continues to improve, current consensus projections by economists show the first interest rate increase of this cycle (i.e., “liftoff”) to occur sometime in 2022 and subsequently climb to a still extraordinarily low level of 2.0% by 2024 (see “Dot Plot” below). For reference, the projected 2.0% figure would still be significantly below the 6.5% Fed Funds Rate we saw in the year 2000, the 5.3% in 2007, or the 2.4% in 2019. If history is any guide, under almost any scenario, Chairman Powell is very much a dove and is likely to tap the interest rate hike brakes very gently.

Source: Seeking Alpha

Low But Not the Lowest

In a world of generationally low interest rates, what I describe as our low bond yields here in the United States are actually relatively high, if you consider rates in other major industrialized economies and the trillions of negative-interest-rate bonds littered all over the rest of the world (see August’s article, $16.5 Trillion in Negative-Yielding Debt). Although our benchmark government rates are hovering around 1.5%, as you can see from the chart below, Germany is sitting considerably lower at -0.2%, Japan at 0.1%, France at 0.2%, and the United Kingdom at 1.0%.

Source: Yardeni Research & Haver Analytics

Taper Schmaper

As with many government related policies, the Federal Reserve often gets too much credit for successes and too much blame for failures, as it relates to our economy. I have illustrated the extent of how globally interconnected our world of interest rates is, and one taper announcement is unlikely to reverse a four-decade disinflationary declining trend in interest rates.

Back in 2013, after of five years of quantitative easing (QE) that began in 2008, investors were terrified that interest rates were artificially being depressed by a money-printing Fed that had gone hog-wild in bond buying. At that time, pundits feared an imminent explosion higher in interest rates once the Fed began tapering. So, what happened after Federal Reserve Chairman Ben Bernanke broached the subject of tapering on June 19, 2013? The opposite occurred. Although 10-Year yields jumped 0.1% to 2.3% on the day of the announcement, interest rates spent the majority of the next six years declining to 1.6% in 2019, pre-COVID. As COVID began to spread globally, rates declined further to 0.95% in March of 2020, the day before Jerome Powell announced a fresh new round of quantitative easing (see chart below).

Source: Trading Economics (annotations by Sidoxia Capital Management)

Obviously, every economic period is different from previous ones, and fearing to fall off the floor to lower interest rate levels is likely misplaced at such minimal current rates (1.5%). However, panicking over potential exploding interest rates, as in 2013 (which did not happen), again may not be the most rational behavior either.

What to Do?

If interest rates are low, and inflation is high (see chart below), then what should you do with your money? Currently, if your money is sitting in cash, it is losing 4-5% in purchasing power due to inflation. If your money is sitting in the bank earning minimal interest, you are not going to be doing much better than that. Everybody’s time horizon and risk tolerance is different, but regardless of your age or anxiety level, you need to efficiently invest your money in a diversified portfolio to counter the insidious, degrading effects of inflation and generationally low interest rates. The “do-nothing” strategy will only turn your cash into trash, while eroding the value of your savings and retirement assets.

Source: Calafia Beach Pundit

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2021). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

October 1, 2021 at 1:34 pm 1 comment

“Patient” Prick Proves More Pleasure than Pain

Needle

I will be the first one to admit I hate needles. In fact, I’ve been known to skip my annual flu shots out of cowardice simply to avoid the harmless prick of the syringe. The mere thought of a long needle jabbing into my arm, or other fleshy part of my body, has had the chilling effect of generating irrational decisions (i.e., I forgo flu shot benefits for no logical reason).

For months the talking heads and so-called pundits have speculated and fretted over the potential removal of the term “patient” from the periodically issued Federal Open Market Committee (FOMC) statement. Since the end of 2014, the statement read that the Fed “can be patient in beginning to normalize” monetary policy.

For investors, the linguistic fear of the removal of “patient” is as groundless as my needle fears. In the financial markets, the consensus view is often wrong. The stronger the euphoric consensus, the higher the probability the consensus will soon be wrong. You can think of technology in the late 1990s, real estate in the mid-2000s; or gold trading at $1,800/oz in 2011. The reverse holds true for the pessimistic consensus. Value guru, extraordinaire, Bill Miller stated it well,

“Stocks do not get undervalued unless somebody is worried about something. The question is not whether there are problems. There are always problems. The question is whether those problems are already fully discounted or not.”

 

Which brings us back to the Fed’s removal of the word “patient”. Upon release of the statement, the Dow Jones Industrial index skyrocketed about 400 points in 30 minutes. Considering the overwhelming consensus was for the Fed to remove the word “patient”, and given the following favorable factors, should anyone really be surprised that the market is trading near record highs?

FAVORABLE FACTORS:

  • Queen Dove Yellen as Fed Chairwoman
  • Declining interest rates near generational low
  • Stimulative, low oil prices that are declining
  • Corporate profits at/near record highs
  • Unemployment figures approaching cyclical lows
  • Core inflation in check below 2% threshold

While the short-term relief rally may feel good for the bulls, there are still some flies in the ointment, including a strong U.S. dollar hurting trade, an inconsistent housing recovery, and a slowing Chinese economy, among other factors.

Outside the scandalous “patient” semantics was the heated debate over the Fed’s “Dot Plot,” which is just a 3rd grader’s version of showing the Fed members’ Federal Funds rate forecasts. While to a layman the chart below may look like an elementary school dot-to-dot worksheet, in reality it is a good synopsis of interest rate expectations. Part of the reason stocks reacted so positively to the Fed’s statement is because the “Dot Plot” median interest rate expectations of 0.625% came down 0.50% for 2015, and by more than 0.60% for 2016 to 1.875%. This just hammers home the idea that there are currently no dark clouds looming on the horizon that would indicate aggressive rate hikes are coming.

Source via BusinessInsider

Source via BusinessInsider

These sub-2% interest rate expectations over the next few years hardly qualify as a “hawkish” stance. As I’ve written before, the stock market handled a 2.5% hike in stride when the Fed Funds rate increased in 1994 (see also 1994 Bond Repeat or Stock Defeat?). What’s more, the Fed Funds rate cycle peaked at 5.0% in 2007 before the market crashed in the Great Recession of 2008-2009.

Although volatility is bound to increase as the Federal Reserve transitions out of a six-year 0% interest rate policy, don’t let the irrational fear of a modest Fed hike prick scare you away from potential investment benefits.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 21, 2015 at 9:15 am Leave a comment


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