Stock Market and Interest Rates: What We Think Now

Many major US stock market indexes are at or near all time highs. Today’s November jobs report continues the trend of steady but not spectacular job growth. The unemployment rate continues to decline.

Our commentary and information can be helpful to provide you with important perspectives.

In general, we take a long term view of the stock market and do not react to singular events such as a jobs report.

What does the current economic news mean for you as an investor?

Summary:

Today’s news is positive, as the more employment improves, the better the overall economy will be. That should translate into greater corporate earnings, which is good for stocks. A better economy should cause interest rates to rise to more normalized levels over time. This is good for individual bond holders and those whose portfolios are heavily allocated to fixed income investments, who desire more interest income.

Interest Rates:

For this article, short term rates are defined as maturities less than 3 years and mid-long term rates are defined as the 10 year Treasury bill.  For short term rates, the Fed has stated that these will continue to remain very low, likely below 1-2% for a long time. Today’s jobs report and the next Fed meeting will not significantly change short term interest rates.

For longer term interest rates, it is likely that these will continue to increase, as they have done throughout much of 2013, though not in a straight line. The focus will be on upcoming Federal Reserve meetings and how/whether they adjust the quantitative easing program (QE).  Under QE, the Fed purchases $85 billion of bonds monthly, as a way to hold down long term interest rates.  It is likely that the Fed will begin to decrease their monthly bond purchasing in the near future, from the $85 billion level.

The Fed has dual goals, to increase employment and to keep inflation around 2% annually. For the Fed to be reducing the QE program, the economy would be improving and more workers are being hired.  From a societal standpoint, this would be good.  As QE bond buying is reduced, or anticipated to be reduced, long term interest rates are likely to rise.  Some may be surprised by how quickly or how dramatically this could happen.  Earlier in 2013, the 10 year interest rate was 1.6 -1.7%. In late October it was 2.5%. Today, it is around 2.9%.  These are big changes in relative terms.

While the Fed has consistently been incorrect in their future economic predictions (providing even more evidence that the best, brightest and most informed cannot consistently make reliable economic forecasts over time), they feel inflation is under control and is “persistently below its 2% objective.”  These comments and the limited growth of employment indicate that the Fed will be slow and moderate in ending the QE program.

Stock Market:

We feel that the economy is steadily improving and the stock market is reflecting the resiliency that we have discussed many times over the past few years. Corporations continue to increase earnings and cash flow, are making huge stock buybacks and refinancing their balance sheets to take advantage of low interest rates.

Your attitude towards the stock market has to reflect your emotional perspective and factors such as your time frame for investing.  This is like a glass half full or half empty opinion. Which do you have?

We have a long term positive focus. We look at historical data and facts to determine our investment strategy. The economy has improved much better than many people recognize. Data such as housing starts, car sales, home prices and employment growth have all been positive.

There will always be some economic or political concerns.  The annual federal deficit has reduced dramatically, but the overall federal debt is still a concern. The new healthcare law is a great worry for many. Instability in the Middle East is always a concern.  What unknown event could occur that impacts the market or the economy?

 

We welcome the opportunity to discuss the current economic information with you and its impact on your portfolio. We strive to help you achieve a sense of financial comfort and security. We help you to organize, manage and grow your resources, so you don’t have to worry about the Fed or labor statistics.

 

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