Six months ago, the Federal Reserve Chairman Bernanke stated that he was committed to maintaining low interest rates until the unemployment rate dropped to 6.5 percent. At that time, official unemployment figures stood at 7.9 percent. That number has since declined to 7.2 percent, still much higher than the desired figure. Yet, the bond markets are reacting with extreme, even irrational, prejudice. What is going on?
Recently the Fed Chairman said it again… when the economy shows signs of recovery, he will “taper” the purchases of bonds. Adding to the correction already in progress, the stock market pitched a four day tantrum, echoing the bond market. But, don’t be too discouraged by recent markets. Measured by the S&P 500, a gain of approximately 21 percent has rewarded investors over the past 52 weeks. More encouraging is the year to date return for that index, which is close to 12 percent.
We think it significant that this strength continued through globally dysfunctional political times…sequestration, the debt ceiling, Iraq, and European disorder. Add to that the continuing high unemployment rate in this country and the picture becomes clearer. Any Federal Reserve language that even hints at reduction of the $85 billion per month support for the bond market is perceived to endanger the economic recovery. The concern is that bond interest rates will be driven higher as investors flee fixed income.
We do not expect a collapse of the bond market. We do expect the economy to recover slowly, though some moderation in stock prices may occur, given the recent strong showing. Prudent investors will continue to allocate assets broadly and utilize alternative income strategies. We believe that a careful review of risk tolerance and capacity is at the core of the investment planning process. The execution of your financial plan demands thoughtful consideration.
We will be in touch with you soon, but don’t hesitate to call if there are changes in your situation!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.