So far this market is performing as predicted. The sell-off began at the end of May and June is shaping up to be just as disappointing. July should be no great shakes either but all this means is the markets are setting up for a great fall and winter.
By now everyone understands what is behind this decline. The Fed, every investor’s favorite date for several years, is now threatening to take a powder and investors don’t like it. Of course, like jilted teenagers, investors believe that things will never, ever be the same; that the markets are fraught with new risk now that the Fed won’t be supporting the markets. Interest rates will continue to spike higher, thereby sending all of us back into recession or even worse, a Depression.
Fortunately, all of these fears are both unfounded and extremely short-term in nature, but what do you expect from a market that has no memory from day to day? Tapering isn’t the end of the world, in my opinion, but it could be the beginning of a brave new one. In fact, the Fed’s decision is actually good news for the markets, employment and the economy as I explain in this week’s column “The Fed Speaks.”
To me, the Fed’s decision to gradually reduce some of its $85 billion/month stimulus program over the next six months was just the excuse the market was looking for to justify some profit-taking. Investors are so busy selling fast, before the next big imagined downdraft, that I suspect it will take the rest of the summer before cooler heads prevail. In the meantime, as I have warned readers over the last month, expect more volatility and downside as well as some upside. Overall, worst case, I see 5% more downside from present levels.
We are not alone in this sell-off. Markets around the world are slipping as worries surface that other countries might need the Fed’s continued stimulus more than we do. Europe, for example, is not on as firm a footing as our own economy. This is largely due to the EU’s (read Germany’s) foot dragging in stimulating the EU community. Instead, Angela Merkel’s misguided austerity policies have hamstrung Europe.
It is a fact that our massive and prolonged stimulus programs have helped Europe’s financial system as well as those of many countries including most of Southeast Asia, the emerging markets, as well as our chief trading partners, Canada and Mexico. There may be some truth to these foreign concerns. However, most governments have come to the conclusion, after much internal debate, that the U.S. approach to stimulate makes more sense than continued austerity. Japan’s Abenomics stimulus effort is a great example of that trend.
As for the backup in U.S. Treasury interest rates, I think it is overdone and rates will come down somewhat over the summer, but not by all that much. Prices of the most popular “safe” and “conservative” securities, everything from high grade corporate bonds to preferred stocks and dividend paying common stocks should also see a rebound in price as well. Yet, in a rising interest rate environment, (which is what we will face in the future), readers will need to re-evaluate what it safe and conservative.
Right now, I advocate doing nothing except enjoying the weather. I advised clients in May to stop checking their portfolios expecting higher returns every day. Do yourself a favor, turn off the computer or television, and enjoy yourself for the rest of the summer. When you come back to it in September, you will find your portfolio is just about at the price level where it is today.