Quite a Ride February 25, 2016
Pundits and broadcasters swing from one issue to the next almost hourly. The Federal Reserve interest rate tightening finally began in December and somehow seems like ages ago. The months of market sentiment swings about a tightening being good or bad for stocks was dizzying. Currently, the best the Federal Reserve can hope for is to not take back the one (now maybe only) tightening it’s made.
It’s been quite a nasty ride in the markets lately. So have we finished with the Bear, and will things slowly get better or are we in a relief rally, which you might be better off selling into? The litany of issues that can suddenly transfix markets are difficult to imagine must less predict.
The pundits and broadcasters swing from one issue to the next almost hourly. The much-belabored Federal Reserve interest rate tightening cycle finally began in December and somehow that seems like an eternity ago. The months and months of market sentiment swings about a tightening being good or bad for stocks was dizzying. Just a month ago we were still hearing talk of quarterly interest rate increases coming down the pike in 2016. Currently, given the global stock market meltdown of 2016, the best the Federal Reserve can hope for is to not take back the one (now maybe only) tightening it’s made. This pendulum swings back and forth so rapidly, trying to trade around it is like skiing a double black diamond in hockey skates: a ridiculously wild ride with no possible positive outcome.
Are we headed into a recession – as some have suggested – or are we going to continue to scrape bye growing at the current anemic pace. Will the world’s largest economy ever return to the days of 3- 4% GDP growth? There are now new challenges considering the widespread acceptance globally of negative interest rates. Evidence is lacking that the final attempts at Quantitative Easing (QE II/III) accomplished their objectives and now we are beginning to pull back the curtain on the world’s central bankers. Can they really do anything except throw more fuel on the fire by offering even lower rates? Cleary Japan has been facing this issue for decades and their long experiment with zero rates doesn’t offer up much hope.
Will we ultimately be forced to just watch our savings erode at the negative rate of the day? The feeling of helplessness that will come if you must watch your savings erode slowly each day and cannot withdraw larger amounts of cash would be frightening. Will you be effectively forced to invest in something you aren’t wild about just to keep the banks from eating away at your savings? It would seem gold should, would, or could catch fire as an alternative form of currency.
It’s really time for the adults in the room to address some of the more serious structural or fiscal problems holding the US economy back. Consider changing some tax laws, encouraging more R&D, maybe discouraging company stock buybacks as a panacea. We should be looking at ways to encourage the numerous US-domiciled multinational corporations that hold hordes of cash off shore to reinvest some back in the USA. The flash fire techniques of easy monetary policy have now – through overuse – lost the capacity to ignite growth. They need now to be followed up with hard political decisions in the form of fiscal policy changes. If the gridlock in Washington continues under the next President, we won’t care who won the election.
The focus may soon bounce back to China from oil, or perhaps a new situation in the Middle East, maybe even Eastern Europe will start the turmoil again. In any case, we are at a point of market sensitivity and reactions that are swift and sharp.
My feeling is that the right move for most investors is to hold enough cash or short term Treasuries to cover your predictable expenses for 12-24 months. The average bear market, according to S&P Capital IQ, lasts about 11 months in duration, and then takes about 14 months to recover. Maybe it’s time to create some dry powder in the recent up-trade … call it the “sleep at night” trade. It’s also the opportunistic approach, as dry powder helps to capitalize on better opportunities, if they arise. We would have customers look at their asset mix and consider making a few adjustments here to add to cash reserves.