Tag Archives: Fed

The Economy’s Up! So Why’s the Market Now Tanking?

Unemployment figures are down – by some estimates, we will have regained all the 7.9 million jobs lost during the recession by next spring. GDP numbers, too, are up; the economy grew at a sharp 3.6% pace in the third quarter, faster than even most experts had anticipated. So why has the stock market lost over 2% of its value this week? Shouldn’t this good economic news be boosting stocks (and our 401ks)?

Opposites day

In these market conditions, up is down and down is the new up. Since the Fed began pumping money into the economy to fight the recession via a process known as quantitative easing (QE for short), markets have been accustomed to the extra support. But now that the economy seems to be on the mend, it’s likely the Fed will soon begin unwinding QE, and markets are scared of going without the extra boost. So in a bit of a twist, good economic news is now sending stocks down, while disappointing numbers can send the market on a tear.

Is it really so scary?

There’s an ongoing economic debate about the underlying health of the economy. Once QE is gone, will it falter and dive into recession again? Are the good GDP and unemployment numbers inflated due to QE? Are stocks now overvalued?

True, the market has been on a tear since its 2009 lows, but its growth has been typical of post-recession market increases. Company profits, too, have been growing at a healthy clip, up 39% from their recession lows, and most stock valuations do not seem to imply a bubble – yet.

Plus, Janet Yellen, the incoming successor to current Fed chief, Ben Bernanke, is committed to using the Fed’s available tools for boosting employment. That means QE is likely to continue at least through next spring or summer, and that any unwinding will be gradual and measured.

But is it enough?

Still, valid questions remain regarding the market’s reaction, and as the famed investment manager, Bill Gross of PIMCO notes, it really could go either way — but not as abruptly as you might think. He argues that an unwinding will probably be gradual, as would be a market reaction.

So, does that mean you should get out? Sadly, I (like everyone else) don’t have a crystal ball, but indications are that a full-out collapse is unlikely. There’s too much momentum in the underlying economy, a few more safeguards in our economic system now than there were in 2008, robust corporate profits, and a Fed determined to avoid it. That doesn’t mean we won’t experience declines — perhaps even sustained – but simply that barring hysteria or other unforeseen events, any declines will probably be more muted. And if you believe that the economy is healthy enough to withstand the removal of QE, there’s even an argument for continued growth.

Unless you’re an active trader (which we don’t recommend), this is all a moot argument, however. Someone invested for the long-term is unfazed by market gyrations. Just remember: If you’d pulled all your money from the market in 2008, you would have never experiences the dramatic 160%+ gains since. Staying the course on a strategy of index funds with some diversification based in your risk tolerance remains our recommended approach, no matter which way the stock market winds blow.

Interest Rates Are Rising! Here’s What You Need to Do Now

interest rateThose of us with savings accounts know where interest rates have been in recent years: Nowhere. But the historically low rates used by the Fed to help stimulate lending and borrowing (and by extension, the entire economy) are very likely to rise soon. In some sectors, such as housing, mortgage rates have already doubled in recent months. Here’s what you need to do now to position yourself for rising rates:

Check Your Current Interest Rates

Find out what you’re paying on private student loans, car notes, mortgages, and so forth, because if any of these are variable, that rate will almost certainly rise in the coming months. Now’s the time to switch to a fixed loan if you can, or re-allocate additional funds in your budget toward debt servicing if you can’t. Rising interest rates make loans more expensive to re-pay, so act now to re-finance, if possible. In the case of variable rate mortgages (whose rates are already increasing rapidly), you should have acted yesterday, so get moving!

Re-Think Savings & Money Market Accounts

My “high yield” savings account has been paying me less than 0.8% interest – and I’ve gladly taken it, because safe sources of yield have been hard to come by in recent years. But many investors have shunned savings and money market accounts and CDs in search of better returns elsewhere. If you’ve been reluctant to hold cash because of low yields, it may be time to re-consider. (Who remembers the pre-recession days when such accounts yielded four or five percent?) Rising interest rates will provide you with better returns and a safer environment for your funds. That’s of real benefit if you’re expecting to make higher payments on variable-rate loans — or if you just plain want more money in the bank.

Bond Market Malaise

Rising interest rates mean a decline in the value of bonds (these move inversely), so the recent suggestion that the Fed might ease back on its bond purchases some time later this year has caused a mass sell-off in the asset class. Depending upon your investing style, this may be the time to re-consider your bond holdings. Some experts believe the worst is yet to come and are encouraging a complete departure, while others think the demand for bonds will re-surface as banks, major companies and government entities seek new purchases to roll-over older debt. They see this dip as a buying opportunity. Either way, one thing’s for sure: Bonds are likely to suffer in the coming weeks and months. Consider positioning yourself accordingly as you see fit.

Potential Five Ten Twenty Club Savings Example:

Let’s say you have a $10,000 savings account that is currently earning 0.5% interest (and that you don’t add a single penny to it). If rates return to their pre-recession levels of about 4%, you’d be earning eight times as much interest! Such a dramatic rise is unlikely in the near-term, however, so let’s focus on a more realistic new rate of about 2%.

Total Savings With 1-Year Interest Gains: $10,200 (vs. $10,050 at current rates)

Total Savings After 10 Years: $12,190 (vs. $10,500 at current rates)

Total Savings After 35 Years: $20,000 (vs. $11,900 at current rates)

..And, if rates do rise to 4% again, you’d have almost $40,000 after 35 years!

What interest rate are you earning on your savings account(s)? Have you started looking at whether your interest rates are variable or fixed? What do you plan to do next? Share your story in the comments below or in our Community Forum!

Disclaimer: This post is for your consideration only and should not be taken as actual financial advice. Please consider consulting a financial management professional before modifying your investments.