Insights & Advice


Game Changer


This week’s gain in non-farm payroll jobs was good news for the economy.  Employment data revealed the country created 195,000 new jobs, just a hair’s breadth away from the 200,000 jobs a month we need to sustain an accelerating economy. So why isn’t the stock market celebrating?

To answer that question readers should recall my “Goldilocks Market” column in April. At that time I explained that as long as the porridge of economic data was neither too hot (strong) or too cold (weak) the Fed would continue its stimulus policies.  This week’s jobs numbers as well as last month’s which were revised considerably higher) indicates that we are reaching that threshold of job creation that gives the Fed a green light to begin tapering as early as September.

Certainly the bond market thinks so. No sooner had the jobs data been announced than U.S. Treasury bond rates spiked, with the ten year note jumping 8% from 2.5% to 2.7%. That kind of reaction took the wind out of the stock markets sails. The S&P 500 Index, which had been up almost 20 points, fell back to even before noon.

For those technically-minded readers, you may have noticed that the S&P 500 Index is trying (and so far failing) to get above its 50 day moving average at 1,624. Given it’s summer and there isn’t that much to do, traders are fixated on that line in the sand. They argue that if we can’t break that level then the markets still have more downside ahead.

In the very short term that is probably true. I have forewarned investors to expect a choppy summer as markets digest the gains of the first six months of the year. Both stock and bond markets need time to digest the Fed’s gradual withdrawal of stimulus from the financial markets. That, my friends, is a good thing. It gives those who are underweight stocks and overweight bonds a chance to rebalance their portfolios.

Normally conservative investors hold as much as 70% or more of their portfolios in bonds. Until now, that has been a winning proposition with bond holders receiving interest income and price appreciation at the same time. Those days are over. Going forward, I advise investors to dump all U.S. treasury bonds, pare down their exposure to corporate bonds and confine their bond holdings too extremely short duration fixed income investments.

Take the proceeds of those sales and invest them in the stock market. If you need income, there are plenty of dividend paying stocks and funds that you can buy. Call or e-mail me for more ideas on that subject.

“But aren’t stocks much riskier than bonds?” asked one retired reader from Connecticut.

That kind of psychology is understandable,  given the thirty-year bull market we have enjoyed in bonds, but completely wrong-headed when we contemplate the future. Interest rates are at historically low levels. In my opinion, they have only one direction to go. Baby Boomers need to change their attitude toward bonds as safe and conservative investments.

When interest rates rise all bonds are subject to interest rate risk. Interest rates are going up and will continue going up for several years. That means the price of your bond holdings will continue to decline. Don’t wait until your bond portfolios are down 25-30% before making the switch out of bonds and into equity.  If you are retired, you can’t afford to wait.







Posted in A Few Dollars More, At the Market