I normally don't comment on the markets because it's an educated guess and any time you guess you have a high probability of being wrong. However, I wanted to take this opportunity to make just a few observations on our current economy.
Earlier this spring the Federal Reserve announced that it was going to be tapering or reducing the quantitative easement (QE) program later this year. Now QE is the program where the Federal Reserve is purchasing $85 billion of US treasuries and mortgage-backed securities each month. This then allows the Treasury to create new money which is largely made available to larger financial institutions.
The quantitative easement program has been a boon to Wall Street but not much for Main Street. Every time the Federal Reserve even hints that it might slow down the QE program; the markets react in a very negative way. Starting in May of this year the interest rate or yields on the 10-year treasury notes started to increase. In fact, they have increased by more than 50 percent since early May and are now at 2.56 percent.
The 10-year treasury note serves as a benchmark for interest rates in many sectors of our economy. It also comprises a significant portion of many bond portfolios. To highlight the effect this rise has on bond portfolios; during the same time the PIMCO total return bond ETF has declined 4.81 percent. That is because as interest rates or yield increase; the price or value of existing bonds decreases. So, for many of those out there holding bond portfolios, you have seen the value of your accounts decrease over the last three months.
This trend very well may continue throughout the year. We have been at historic lows in interest rates and it is only a matter of time before they start to rise.
During the same time the markets went through a little rough ride. Starting in mid-June the S&P 500 declined by about 5 percent but has rebounded since then and over the last three months shows about a 6 percent gain. So, in spite of the recent volatility, the equity markets have been performing well enough. Assuming that the Federal Reserve doesn't suddenly pull the plug on the QE program; equities may be the preferred investment option for the near-term.
Another area affected by the increasing interest rates is mortgage rates. An article posted on CBS MoneyWatch on July 25 stated that," at this time last year, interest rates on benchmark 30-year fixed rate loans were hovering around a record lows at 3.5 perccent, or even less." According to bank rate.com, 30-year fixed rate in our area now averages about 4.38 percent (with 10 percent down, 0 points). It would appear that mortgage interest rates will continue to follow the lead of the 10-year treasury and increase.
Page 2 of 2 - The economy continues to send mixed signals. The auto industry and housing market are two of the brighter spots. Unemployment is at 7.6 percent but in the month of June there was a significant increase in part-time employees. I believe this is a direct result of businesses reacting to the Affordable Care Act or Obamacare. Companies are hiring more part-time employees to avoid the costs of the healthcare mandate for companies with 50 or more full-time employees.
The White House recognizes that there are significant problems with implementing this onerous bill and have delayed implementation of the employer mandate until 2015. Past the next election. I find that to be a complete lack of integrity on the part of the administration. It's a backhanded way of admitting that this bill, as written, is unworkable and that implementation is likely to be a significant drag on the economy.
As I stated above, the equity markets may be the preferred choice for the near-term but QE will have an end and when it does, there will be a correction.
Previous articles are posted on my web page at http://theretirementexperts.us/. If you would like to comment or make any suggestions, contact me at larrymartin@ theretirementexperts.us or call at 651-4321.
Larry Martin is a registered investment advisor offering advisory services through Main Street Advisor, LLC (MSA). The opinions expressed in these articles may not represent those of MSA. 1407 Main Street, Hays, KS 67601. The Consultants Financial Services, LLC and MSA are not affiliated