Tahoe Market Pulse: No surprise … Fed doesn’t raise rates
September 29, 2016
To those who regularly read this column, it came as no surprise that the Fed chose not to raise rates. So when will they?
It may be December, if only to fulfill a year-old prediction that rates would rise in 2016. Fed governors have been speaking every day, often with conflicting messages.
Janet Yellen should have a chat with the governors: "We need to have one voice here … mine." Everyone would be better served.
For three years, starting with Ben Bernanke's frequent warnings, we've been told to avoid rate-sensitive stocks.
For three years utilities have been very good places to be. XLU, the S&P Utility SPDR, is up 35 percent over three years, not counting the dividends (add another 12 percent).
Preferred stocks and exchange-traded debt, which logically would fall if rates were set to rise, rose.
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Investors (I included) don't foresee conditions that would make the Fed raise rates more than a little, nor economic conditions (sustainable growth of 2.5 plus percent) that would warrant more. Nor does the Fed.
Little reported was that the Fed lowered its forecast for long-term growth from an unacceptable 2.0 percent to a dismal 1.8 percent.
The good news: the Fed's record as a forecaster of GDP is horrible. However, if by chance they have it right this time that would be truly sad. Personal income won't rise much for years and standards of living will suffer.
The Fed's long-term forecast underscores the certainty that rate boosts from time to time, if they occur at all, will be a non-event for investors.
Short-term income vehicles and money-market funds that pay next to nothing now will pay next to nothing in 2017 and the year after.
They'll pay even less overseas where central banks are convinced that negative rates will encourage banks and investors to put money to work, the record notwithstanding.
And we're going to be the one central bank that is raising rates? In an economy whose long-term growth prospect is 1.8 percent? I don't think so.
So where does that leave us? Where we've been for years — owning quality stocks with good yields and dividend growth. Owning preferred stocks and some exchange-traded debt. It won't be a rip-roaring bull market, but rising prices.
Bottom line: The bull market is alive and well. Let's allow for periodic sell-offs and rallies, but prices will move higher in fits and starts.
Only the prospect of substantially higher interest rates would undermine the market and make alternatives attractive. I see no catalysts for that, nor it seems does the Fed.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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