Federal Reserve Chairman, Ben Bernanke, announced that the Federal Reserve Bank would continue its monthly purchases of Treasury securities ($45 billion) and mortgage-backed securities ($40 billion). He didn’t say specifically for how long, but stated the Fed may start scaling back later this year and halt them entirely in mid-2014. Don’t hold your breath.
Reasons cited for continuing the purchases were that inflation is too low (less than 2% annually) and unemployment is too high (7.6%). I think most of us who purchase things would argue that inflation is NOT below 2%, so my take on this is that the Fed is focusing more on unemployment and is less concerned about inflation.
Interpretation: We are eventually going to experience inflation. The Fed wants it. The Fed feels like we need it. The Fed is doing everything it can to create it. Unfortunately (for the Fed) the economy is just not cooperating. Sluggish growth and high unemployment continue to keep inflation at bay.
Last Friday, the Department of Labor released the latest employment statistics. 162,000 new jobs were created in July, reducing the unemployment rate to 7.4%. The number was disappointing since a figure closer to 200,000 was expected. In addition, the quality of jobs was not of the “full work week/high pay” variety but more of the “part time/low pay” sort.
And the drop in unemployment from 7.6% to 7.4% was partly due to people giving up looking for work. Remember, the unemployment rate only counts the number of unemployed who are looking for a job. When you’re pushing a grocery cart containing your worldly possessions, you are no longer considered unemployed.
However, that makes 34 consecutive weeks of positive job growth. Very unimpressive and sluggish job growth, but positive job growth nevertheless.
Meanwhile, the stock market continues its march upward, increasing almost 5% in July. It’s up almost 20% for 2013 and close to 25% over the past twelve months. Foreign stocks have done almost as well although Emerging Markets are down this year and barely positive for the past twelve months.
Interesting note: Since the market bottom on March 6, 2009, the S&P 500 has advanced 170%, including dividends.
The bond market, after a disastrous June, was much more sedate in July. The interest rate on the 10-year U.S. Treasury bond began the month at 2.48% and ended at 2.57%. It traded in a very narrow range the entire month, pretty much as we expected.
After increasing our exposure to the stock market at the beginning of 2013, we began to “lighten up” last month. And, of course, the market continued upward.
Why does the stock market keep going up (June’s decline notwithstanding)? No one really knows (and if they tell you they know, run quickly the other direction), but here are a few of my guesses/opinions:
- We continue to experience virtually no headline risk. No terrorist attacks. No countries defaulting on their debt. No governments being toppled (except for the usual suspects in the Middle East and Africa from which we expect a fair amount of toppling every so often). No natural disasters.
- Corporate earnings are growing and corporate balance sheets look good. One of the “benefits” of the 2008 economic crisis is that it allowed corporations to trim a lot of dead weight off their payrolls. As the economy has improved, the same production is being done with fewer workers and the quality of earnings is better.
- Volatility in the markets is almost non-existent. As I have said many times, stock markets like tranquility and certainty. They don’t like cacophonous unpredictability. The Volatility Index (VIX), which is a measure of stock market volatility traded as high as 80+ during the 2008 stock market decline. Today, it is hovering around 13. Boooooorrrrring.
If anecdotal airline travel experience is any indicator of economic health, then maybe this stock market has more legs than you think. In the past month, I took eight different flights and every one was jam-packed. Maybe there were a few empty seats on a couple of flights but Southwest Airlines seemed to be very, very busy.
We don’t invest in airline stocks but if we did, we would consider an investment in Southwest. Nothing fancy about this airline. If all you care about is getting to your destination on time and in one piece, they seemed to have figured out a formula that makes that happen with the least amount of hassle. But we still won’t invest in the airline. We aren’t saying you can’t make money investing in airline stocks. We just don’t know how to do so with any degree of predictability.
The reason we don’t invest in airline stocks is that the airline industry does not control its destiny. Between governmental regulation, terrorism and the unpredictable price of fuel, it is impossible to predict if airlines will have a banner year or go bankrupt. When the terrorists flew jet airplanes into the World Trade Center in 2001, Walmart didn’t have to close its stores for a week. The airline industry, however, was grounded, losing billions of dollars every day.
As I talk with people, there seems to be an increased level of fear out there regarding the financial stability of our nation. Talking heads and “gloom and doom” newsletters seem to be grabbing the average person’s attention more persistently. Maybe people should be more worried. Maybe disaster is just around the corner. However, the grave predictions are nothing new. We have been hearing them for more than five years. Eventually they are probably going to have some merit.
Meanwhile, those dour naysayers have missed several years of attractive investment returns, in both the stock market and the bond market. As I have pointed out before, you can ultimately be correct in predicting economic events, but appear to be incorrect for a long, long time.
At Boyer & Corporon Wealth Management, we are not bracing ourselves for a financial hurricane (yet). We remain vigilant and hope we will detect signs of imminent financial train wreck and be able to step aside. My motto is:
Never panic. But if you’re going to panic, panic first.
Even though my motto says to “panic first,” we feel it is way too early to do so and are staying invested in both stocks and bonds.
Regarding the bond market, we feel the “big” interest rate move was made in June. We are not concerned about a panic or collapse in the bond market and feel investor concerns about rising interest rates are exaggerated. Having said that, we are not extending our duration and stay focused on trying to reduce duration.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.