To begin our teleseminar, we need to ask the question – will the Fed taper their Quantitative Easing efforts?
The short answer is that the Federal Reserve is not going to change bond purchases in the near future. This is a surprise, because for some time the Fed has been setting us up to taper their bond purchases, which add up to about $85 billion per month for the past eight months. The goal of this bond-buying plan (QE3) is this: keep long-term interest rates low, and so restart the housing market. However, while the Fed has somewhat succeeded there, many feel that QE is not helping employment or kickstarting the economy. So many investors are wondering whether the Fed is painting itself into a corner and people will lose faith in what the Fed is doing.
The Federal Reserve needs to maintain credibility and back off bond purchases to get out of this, allowing markets to normalize. Right now, the Fed is giving confused signals and markets are nervous. The bond market is rallying, and we believe investors are being handed a golden opportunity to reduce bond holdings and re-deploy those assets into new, different income-producing strategies.
We’re seeing mediocre economic growth despite extraordinary effort on the part of the Fed. Upcoming, we have the debt ceiling negotiations, and the October 1st implementation of Obamacare – it’s unknown what that will do to small businesses and families and how it affects the economy. Internationally, we’re also seeing a rise in interest rates and an expansion of debt around the world in central banks.
Investor complacency is very high right now. For the last two years, we haven’t seen much volatility and many investors are hanging on to positions that are too aggressive or just not the right fit for their objectives. Know what you own, be prepared to take action and think about the fact that volatility is coming our way in the future.
What are the future risks for your holdings? Rallies in the market are an opportunity to get rid of underperforming or risky investments, so see these bond market rallies as your chance.
Click on any graph for larger images.
Notice the gauge of sentiment chart. When people are bullish, you’re usually near a price high, if sentiment is bearish, the price is typically at a low point.
If you take this bond rally as an opportunity to get out, we do not advise that you jump back into equities right away, as the stock market is very high right now. We advise that you go to a high-cash position, and reevaluate your opportunities, almost as if you had new money to invest.
Also notice that the dollar is nowhere near lows right now. There’s been some competing currency devaluations around the world. Higher interest rates are a headwind to emerging markets. However, emerging markets look like a good opportunity at this time, assuming interest rates stay reasonable.
Here are some general ideas for Income Strategies:
- Floating Rate Funds
- Global dividends
- Oversold income generators
- Alternative income (business-development corporations, private equity)
- Closed-end funds
And, some general ideas for Growth Strategies:
- International equities
- Closed-end funds
Finally, our action plan for investors:
- Avoid complacency
- Know what you own and why
- Risk management is very important
- Large cash positions need to start with small investments in high-yield areas
- Look closely at your mutual funds and make sure they are all worth the investment
- Ask yourself, is every portfolio position aligned with your objectives?
- Pay attention to the actions of the Federal Reserve and the macro-economic picture
As always, we want to offer a personal, one-on-one consultation with Doug about the ideas you’ve heard today and what’s next for your portfolio. If you need more help or would like more information about the items discussed today, please call our office at 800-391-1118, fax 714-668-9813 or email info(at)fabianwealth(dot)com.
We’ll be answering questions about this teleconference on the podcast next week, so if you have specific questions for Doug that you’d like him to answer on air, please email askdoug(at)dougfabian(dot)com.
As always, this is simply an overview recap of the teleseminar. For more detailed information, please listen to the full recording here and at our teleseminar page here.