What should you do now that the Fed has raised rates again?

In mid-December, the Federal Reserve raised interest rates again, contributing to some of the whipsaw volatility we saw at the end of the year. As an investor, you may be wondering what you should do now. Consider these three things: Review your portfolio Does your asset allocation still match your time horizon, risk tolerance, and investment goals? If so, you might consider leaving things unchanged. It might not sound like a special strategy, but most people miss out on the long-term gains of the market by making moves at the wrong time. Keep on keeping on There will probably be more volatility in store. Embrace it. The S&P 500 stock index has become more turbulent in 12 of the last 14 tightening cycles, including this one. But that shouldn’t mean a whole lot to a long-term investor. Ride the market’s ups and downs, and you could be rewarded for your patience. Diversify Treasury bonds are most sensitive to movements in interest rates. As an alternative form of fixed income investment, consider high-quality trade finance investments and sukuk, both of which offer liquidity and diversification benefits in a rising rate environment. And for some serious diversification, it’s hard to beat participation

January 4, 2019 No Comments

What to make of last quarter’s market volatility

Recent market volatility is a reminder that there are risks to investing. Given that markets has risen over the past 10 years without a major pullback, a downturn is a normal and healthy part of market movements. Without corrections, markets can become overvalued and bubbles can form. Concerns about an economic recession, however, are still low; we continue to see strong fundamentals and a generally sound economy. Economic data remains strong, including consumer confidence, retail spending, and employment trends. And although the Fed has raised interest rates, they are still far below levels that might choke off economic growth. All of this begs the question: if everything is fine, why did markets drop so suddenly? Several fear factors have come together to spook investors, including trade with China, uncertainty in Washington, and the Federal Reserve’s interest rate policy. These factors may continue to cause fluctuations in the short term, but it’s important to keep in mind that these do not reflect the fundamentals of corporate America or the economy. Another factor likely contributing to rapid market decline is that much of the trading these days is done through hedge funds, ETFs, and automated trading. One manager noted that some 150

January 4, 2019 No Comments

Is it time for a reckoning in stocks?

Is it time for stocks to sell off? In light of the 10th anniversary of the collapse of Lehman Brothers last month, we should remember that it’s a mistake to be complacent about what could happen in markets. Extreme economic and financial events are far more likely to occur than we like to believe. But the real lesson of Lehman is not so much that very bad things can occur — it’s that anything might. Investors should be mindful of the risk of further crises, but they should also keep in mind the possibility that things might turn out just fine. This is hard to do. It’s far easier to think of ways that things might soon go wrong. The U.S. stock market is the most expensive stock market in the world currently, according to renowned Yale economist Robert Schiller. The economy has enjoyed a long expansion — maybe too long. The S&P 500 hit its market bottom in March 2009, and since those lows, it has rallied 334 percent in the longest stretch on record since World War II without dipping into a bear market. Perhaps the Federal Reserve will tip it into recession. The trouble in emerging markets

October 8, 2018 No Comments

How the Fed impacts your portfolio

Since September of last year, the Federal Reserve has been buying $85 billion in bonds every month, aiming to lower long-term interest rates and boost economic growth. Overall, the U.S. central bank has bought more than $2 trillion of government bonds, private debts, agency housing debts and other bond instruments dating back to the Financial Crisis. It has paid for these purchases by crediting funds to the reserves of private banks, which is commonly referred to as “money printing.” Liquidity trap The Fed began printing money because, in its view, the crisis plunged the country into a “liquidity trap,” a situation in which many people hoard cash due to uncertainty and the lack of good options for a decent return. America spent most of the 1930s in a liquidity trap; Japan has been in one since the mid-1990s; and the Fed is operating as if the U.S. is in one now. Economists who study liquidity traps, including Fed Chairman Ben Bernanke, argue that some of the usual rules of economics don’t apply as long as the trap lasts. Budget deficits, for example, do not drive up interest rates in a liquidity trap, and printing money does not have the same inflationary

June 11, 2013 No Comments