Tag

interest rates

Don’t Bite Off More Than You Can Chew

By | 2019, Money Moxie, Newsletter | No Comments

How Much Home Debt is Too Much?

You’ve decided to buy a house. Congratulations! Now, what? How do you know how much home you can afford? The last thing you want to do is take out more debt than you can handle. Remember, lenders will approve you for a loan with payments much higher than you should ever pay on a monthly basis! It’s up to you to know how much you can really afford.

Flexibility

Consider your budget. Are vacations a priority? What about other interests and goals? You need to keep your monthly debt payments under 36 percent of income, so you have the financial flexibility.
(Sharla’s recommendation of 28 percent on page 5 was for housing debt only, while the 36 percent is for total debt.)

Interest Rate

Something else that will affect your budget is the interest rate on your mortgage. Even a small change in interest rates can significantly impact how much you can afford. If interest rates go up, or your credit history is a little rough, you won’t be able to afford as much home since you will have to pay more in interest.

Total Debt

Your monthly mortgage expenses and all other debt payments should not exceed 36 percent of your gross monthly income. Add your potential mortgage payment and other debt payments (car loans, credit card debt, student loans, etc.) together, then divide by your before-tax monthly income.

For example, if John is considering a housing payment of $1,800 (including mortgage, insurance, property taxes), a car payment of $300, and a student loan payment of $150, that would equal $2,250. Divide by his $6,500 monthly, and we have the percentage. These fixed expenses would be 34 percent of John’s gross income (under 36 percent, so he should be in the clear).

Monthly Payment

To get the price of a house you can afford, search for a mortgage calculator online and plug in the numbers. Going back to my previous example, we determined that John could afford a mortgage payment of $1,800 per month. If he gets a 4 percent interest rate and has $20,000 for a down payment and closing costs, with a loan of 30 years, he could afford a home that is around $285,000.

Down Payment

The amount of your down payment will also factor into how much you can spend on a home. The more expensive the house, the bigger down payment you will need. The bigger your down payment, the less your mortgage and payment will be.

If you have a 20 percent down payment, your monthly payment will be much less since you won’t be required to have mortgage insurance.

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Spiking the Punch Bowl

By | 2019, Money Moxie, Newsletter | No Comments

Why Federal Reserve Shouldn’t Lower Rates, But Will Anyway

I don’t remember a time when people have been more worried about a recession than they are now. Even the Federal Reserve has been so cautious that it has painted itself into a corner. It plans to lower interest rates on July 31st even though there is little need to do so.

The Fed cuts rates in order to stimulate greater borrowing and spending. It believes that the economy may have peaked in 2018 and may only be growing by 1.6 percent right now (Federal Reserve Bank of Atlanta). That slowdown has the economists at the Fed worried. They have repeatedly implied they are looking to lower rates. Such action is likely to boost the economy by causing a domino effect in the interest-rate world–affecting everything from savings to mortgage rates.

However, lowering rates now does not seem like the Fed’s “style.” Justin Lahart, a writer for The Wall Street Journal, summed up the current situation with the Fed nicely:

“William McChesney Martin, the Fed chairman in the 1950s and 1960s, quipped that the Fed’s job is ‘to take away the punch bowl just as the party gets going.’ Today’s Fed plans to spike the punch instead.”

However, ignoring expectations of a rate cut after the Fed members have been so vocal in favor of such action could be shocking. So, it is possible that the Fed will make a change in July while emphasizing all the positive things going on. That would communicate to investors that more rate cuts are unlikely unless the data changes.

U.S. Unemployement

The Fed was created in 1913 in order to make this nation’s financial system more stable and more flexible. It seeks steady prices (inflation) and high employment. Right now, we have both. Inflation is currently at 2 percent–a goldilocks number that is neither too hot nor too cold. Unemployment is at 3.7 percent, which is the lowest level since December 1969.

So, what is the Fed so worried about? U.S. manufacturing is going through a slump. According to Morgan Stanley, new orders for U.S. goods are at their worst levels in 5 years, and they are trending down. It should be mentioned that manufacturing represented just 11 percent of the U.S. economy in 2018.

American consumers, we drive nearly 70 percent of the U.S. economy. According to the Commerce Department, our spending jumped by 4.3 percent in the second quarter of 2019. That is being helped by a rise in wages, which just bounced higher. The Federal Reserve Bank of Atlanta estimates that over the last year, wages have risen by 3.9 percent.

There may be some extra gyrations in the stock market as investors try to forecast the Fed. Hang in there. The good news, according to Ned Davis Research, is that if the Fed does lower rates and the economy turns out not to need it, the stock market has historically done well.

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Federal Reserve Is Expecting Winter In July

By | 2019, Executive Message, Money Moxie, Newsletter | No Comments

Last February, St. George, Utah had its biggest snowstorm in 20 years. Nearby, Zions National Park closed. Local schools did a late start. Motorists on the freeway were asked to use snow chains. The storm total? 3.8 inches! So, not that much . . . if one is prepared.

Without a doubt, the greatest risk in such a situation is overconfidence. The same could be said about investing. And even though it is summer, the Federal Reserve is going to start spreading salt on the roads for wintery conditions.

As I write, the Fed is preparing for its 5th meeting of 2019, which will be held July 30th–31st. The overwhelming majority of experts believes the Fed will lower interest rates for the first time in a decade. It would do this to encourage greater borrowing and give the economy a boost.

Celebrating a rate decrease this July is like increasing your speed on a sunny day while the snowplow drivers are starting their engines. Why are the plows heading out?

The U.S. economy has been growing at just over 2 percent for a decade. Tax cuts provided a short-term bump, but it looks like the growth is headed right back to the 10-year trend. That’s not so bad, but it has the Fed nervous.

If the Fed lowers rates at the end of this month, it is sending a signal to the rest of us that the experts believe there may be some rougher weather ahead. They will be dropping the salt on the roads in anticipation. Only time will tell how the forecast and driving conditions will change.

Are you driving too fast for the conditions with your investments? Stocks and bonds have been wildly positive this year, which has some investors too excited. Most of these gains just brought market prices back to where they were before a negative overreaction last December. That drop has had a lasting impact on how most investors feel. In other words, the market data is neither hot nor cold right now, but investors are too focused on one or the other. So, when it comes to your investments, I recommend going the speed you and your advisor decided on in your last review.

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From Investing FOMO to FEAR

By | 2019, Money Moxie, Newsletter | No Comments

My daily commute often leaves me sitting in traffic on State Street in Salt Lake City. Sometimes it can take 10 minutes to move 3 blocks. During these seemingly hopeless times, I often see a cyclist pass me. I consider the wisdom of selling my car and riding my bike. However, no matter how bad the traffic, I eventually pass the biker–no exception. (As a biking enthusiast, I regularly commute on a bike, but it is not faster.)

As investors, we faced similar thoughts in 2018. Should we make a short-term decision even though we know which vehicle will get us where we want to go quicker?

Investors entered 2018 with a Fear Of Missing Out (FOMO). The stock market had just completed a year where every month was positive. A tax cut had just been passed to stimulate greater consumer and corporate spending. Around the world, growth seemed synchronized, and expectations were rising.

Here is a review of my three predictions for 2018 with commentary on how things turned out.

U.S. growth exceeds 3 percent. The impact of the tax cut, which I referred to as a “sugar rush,” temporarily lifted U.S. growth to make the first forecast correct. The benefits of the cut were so short-lived that investor excitement quickly turned to concern.

The Federal Reserve finally has an impact. Interest rate increases by the Federal Reserve in recent years had largely been ignored by the stock market. This prediction also came true, especially in December when a rate increase was done despite all the problems going on in financial markets.

Investors would be disappointed with the market, but positive economic growth would help the market end the year positive. This prediction seemed to be correct for much of the year. However, it failed in the part that mattered most.

The stock market ended 2018 in an absolute panic! Oil prices were plummeting. The White House could not get a deal done on trade with China. The federal government had its third shutdown in just one year. And, despite all this, the Federal Reserve raised interest rates stating that nothing had changed; the economy was strong.

The stock market sell-off intensified, and the bull market arguably came to an end on Christmas Eve. December performance of the S&P 500 stocks was the worst since 1931. Historically, that makes some sense. The Great Depression began in 1929.

But we were not in the midst of a depression — quite the opposite. Corporate earnings were at record levels. The real GDP growth in this country was around 3 percent. Consumer spending, which represents 70 percent of the U.S. economy, rose in December by 4.5 percent!

What is an investor to do when the economic data is positive, and the market is so negative? At times like this, it is critically important to stay focused on your long-term goals.

It is our job at SFS to help you develop these goals and keep you on track to achieve them. We have tools to provide the necessary clarity and strategies to implement to help you keep moving forward.

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Buy a home now or wait for a recession?

By | 2018, Money Moxie | No Comments

The U.S. housing market is hot and home prices are going through the roof. This is due to a growing economy. Utah is especially impacted by Silicon Slope companies that are bringing in a lot of high-paying tech jobs; i.e. high demand compared to supply.

With home prices continuously increasing, people are questioning if this is the right time to buy a home or if they should wait for a time when the housing market cools off.

There are always ebbs and flows to the economy and markets, including the housing market. Many people remember all too well the housing collapse that we had in 2008, even though that was a decade ago.
We don’t expect another housing collapse like that one in the next few years, but we do expect the overall market to soften up. Maybe we will have a smaller recession in 1-3 years. When that recession happens, housing prices will come down. The question for potential home buyers is, “How far will they come down?”

If housing prices in the area you are looking do become cheaper than they are now, then you may be better off to wait. This is a probability, but there is a chance that even though house prices decrease at that time, they will still be higher than they are today.

The other piece of the equation that many people frequently forget to consider is interest rates.
A 1 percent move in interest rates means you can afford roughly 89 percent of the home you could before. If you were looking at $400,000 homes before, now you can only afford to buy a $356,000 home for the same monthly payment.

The Federal Reserve has indicated that they plan to raise the fed funds target interest rate by 0.25% several more times this year and in 2019 as well. These are short-term rates, but they will impact the longer-term rates that determine your mortgage interest and payment.
We have been at historically low-interest rates for the last decade and once that ship sails I don’t expect to see interest rates this low for a very long time. However, an economic slowdown could bring rates lower again.

If you are moving, at least you have the increase on your existing home to help offset the increase on the home you are buying, unless you are moving from a depressed area to a hot area.

If you are buying for the first time and plan to stay longer than 3 years, now might be the right time to buy just to lock in low-interest rates. However, you still need to seriously consider your financial situation and whether you can afford the home you want. Don’t jump into something that is too much money just because you feel the pressure to get a deal done. Know your limits and be willing to back out if the deal gets too hot.

Renting may feel like you are throwing your money away, but it also provides flexibility. If you only do it for a few years you won’t be that far behind financially. In a few years, you may even be in a better financial situation. Who knows? You might be able to buy a home at a cheaper price than you can today.

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Payment calculation based on a 30 year mortgage, loan of $400,000, principal and interest payment of $1,961 and interest rate of 4.25% vs. 5.25%. Data in graphics and tables from Federal Reserve Bank of St Louis.

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Subzero Rates Freeze Growth and Hold Back Your Portfolio

By | 2016, Money Moxie, Newsletter | No Comments

Crazy things are happening in the world! There is a chronic shortage of demand for goods in global economies. For years, governments have been fighting back—fighting back by dropping interest rates. Recently, rates overseas have fallen to subzero levels.

Negative rates—where lenders pay the borrowers—seemed unimaginable and foolish a few years ago. Now, they are beginning to feel like the new normal. How can individuals and countries flourish in such an environment? They can’t!

What is it like to live in a subzero-rate world?

1. The subzero world is so crazy that global interest rates are at their lowest level in 500 years of recorded history.1

2. The subzero world is so crazy that if you want the German government to borrow your money you have to pay! Hold that bond for ten years until it matures and the government promises to pay you back less than it borrowed.

3. The subzero world is so crazy that many homeowners in Denmark are no longer paying interest to banks for their mortgages. The banks are paying interest to them!

Hans Peter Christensen, a recipient of a check from his mortgage company in Denmark, said this after receiving his first payment: “My parents said I should frame it, to prove to coming generations that this ever happened.”2

The biggest borrowers in the world include the United States, United Kingdom, Germany, and Japan. The figure below shows how low these rates have become.

rates

Negative Rates Matter to Americans.
Low rates overseas make positive rates in the United States more attractive for investors, which pushes U.S. rates down as well. This makes it less expensive for us to take out a mortgage or a car loan. It creates opportunities for businesses to borrow and grow. On the surface, these low rates seem like a benefit.

Low Rates May Have Helped. Now They Hurt.
During the recession of 2008-2009, there was an economic emergency that required extraordinary effort to infuse calm and confidence.

The emergency is over. The economy should come off life support. The reluctance to move forward is now harming the very confidence it was meant to create.

Artificially low rates are also destroying natural incentives to borrow and lend.

Consumers and businesses do better when banks are healthy, but banks are not healthy. There is little profit to be made and a low incentive to offer loans when interest rates are so low. Why take the risk when the potential reward is so low?

Subzero and near-zero rates also encourage transactions that would not take place in a rational world. For example, many corporations now borrow just to pay dividends. Of the 500 largest companies in the country, 44 have paid more in dividends in the last year than their respective net income.3 This financial engineering helps investors now, but does nothing to strengthen a company or its employees.

End the Pessimism.
Despite all the positives in the economy, consumer confidence is low. Investor sentiment is terrible. Most Americans believe we still have not recovered from a recession that officially ended over six years ago.

Look around. Americans are in a good financial place. Most people who want to work have a job. Unemployment is at just 4.9 percent. In Salt Lake City, where SFS is located, that rate is just 3.6 percent.4

then-and-now

A Day of Reckoning Will Come.
The next financial scare could come after fantastic economic growth, leading to inflation and central banks would have to rapidly raise rates—shocking the economy. Or the storm could blow in from the opposite direction: economic slowdown.

If the Fed and other central banks don’t normalize rates now then there will be fewer options in the future to help keep the world economies going in a real emergency.

It’s Time to Begin Moving Back to Normal.
Central banks around the world should stop experimenting. The United States is strong enough to handle a more normal business environment. The Fed can do that by slowly bringing U.S. interest rates up.

The U.S. economy is not perfect, but it is good enough to handle borrowing one quarter of one percent higher. It could even help by sending a signal of confidence to the world—confident workers, businesses, and consumers.

Higher rates may cause the U.S. dollar to strengthen, and that could hurt American businesses that export. However, the United States has the best economy in the world and we are growing faster than any other developed country. Keeping our dollar artificially low may not be a good idea.

We can allow the dollar to rise a little as we bump up interest rates from their near-zero levels. This message of confidence may help increase demand worldwide—giving investors something to cheer about as well.

 

1. Bill Gross, “Negative Interest Rates a Supernova,” Janus Funds, June 2, 2016.
2. Charles Duxbury and David Gauthier-Villars, “Negative Rates Around the World,” Wall Street Journal, April 14, 2016.
3. Mike Bird, Vipal Mongaand, Aaron Kuriloff, “Dividends Eat Up Bigger Slice of Company Profits,” Wall Street Journal, August 18, 2016.
4. Federal Reserve Bank of St Louis.

Research by SFS. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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BREXIT Surprise: What Investors Hate More Than Uncertainty

By | 2016, Money Moxie, Newsletter | No Comments

“If you want to see the sunshine you have to weather the storm.” This advice from Frank Lane describes well the fortitude needed to invest successfully, especially in 2016.

This year began with two extremes: one of the worst starts ever for the stock market followed by a sharp reversal into positive territory. The second quarter gave us something completely different: calm—that is, until Britain’s exit vote from the European Union (BREXIT).

United Kingdom

Surprise!
Most experts did not expect the “exit side” to get 51 percent of the vote on June 23rd. This shocking outcome sent global stocks into a tailspin. After all, there is one thing investors hate more than uncertainty—surprise!

Then a reversal: Six days before the vote and six days after, the S&P 500 index was roughly equal.

We can’t dismiss this historical event completely. The BREXIT vote is profound, not just for its economic impact, but because it clearly demonstrates the extent of anger in Britain and the world with slow growth. The change is contrary to the way the world has been moving since WWII—a time of globalization that has been relatively peaceful and prosperous for the world.

Now, Pandora’s box has been opened and the discontented individuals around the globe may feel emboldened by the BREXIT outcome. The British will now try to stop Scotland and Northern Ireland from leaving the country, as well as businesses in the UK.

Global Trade
If the movement against global trade continues, there may be adverse effects. These could include lower growth and higher inflation.

U.S. Dollar
Uncertainty sends investors to “safer” areas like the U.S. dollar. As the dollar strengthens, imported goods become more affordable and “Made in the U.S.A.” goods become more expensive. A strong U.S. dollar can also hurt U.S. companies because their exports are more expensive to consumers outside this country. Of course, as investors, we are owners in many of these companies.

The strong dollar was a problem in 2014 and 2015 for corporate earnings and the stock market. How big of a problem it is in the future depends on how high it goes.

Interest Rates
Low interest rates may be around for a while longer. The Federal Reserve wants to raise rates back to “normal.” However, it can’t risk destabilizing the markets and it wants to stay away from influencing the election.

Consumers
Short-term benefits to consumers will come in the form of lower interest rates and a strong dollar. Rates could be even more attractive on mortgages, auto loans, and other forms of debt.

A strong dollar should also help make international travel and international goods a little less expensive. Even the rise in oil prices should slow down, which will help keep gasoline prices down for consumers.

Volatility in stocks may increase as investors adjust to the new realities. I would consider any significant drop as an opportunity.

BREXIT is unlikely to have a major impact on U.S. consumers’ jobs, wages, debt, or spending. U.S. consumers are strong and their spending drives 70 percent of U.S. economic growth!

This surprising storm has passed and the sunshine has appeared again. While uncertainty may drive the market over short periods of time, economic growth will drive it in the coming years.

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Investing in 2016 The Fed and Election Years

By | 2016, Money Moxie, Viewpoint | No Comments

January MarketPoint_Page_1

(1) Historically, when rates rise they rise sharply, but “this time will be different.” This phrase raises a red flag. However, I see no need for the Federal Reserve to increase rates quickly. Our economy is growing slowly and inflation is near zero.

Oil and food are unlikely to keep dropping in 2016 like they did in 2015. So, inflation may rise. (Without food and energy inflation is currently 2 percent.)

The Fed stated it may raise rates 4 times this year, but I am not convinced it will do that many.

Normally, rate hikes would be negative for bonds, but U.S. bonds are still paying attractive dividends compared to others overseas.

(2) Election years are not recession years. The economy will expand as the recovery in the United States enters its 8th year. The next slowdown is coming and no one knows when. However, I don’t see convincing data for its arrival in 2016.

Election years usually start positive, slow down in the summer, and then rally in autumn–similar to most years. However, the rally in the fall does not typically begin after election day like many investors believe. It usually begins before the uncertainty is over–catching many off guard that are waiting. The average for a presidential election year is 9 percent.

(3) United States grows and the dollar slows. Global diversification should help investors in 2016, but the United States will continue to be a financial leader. Global returns will hinge on the U.S. dollar.

Since July 2014, our dollar has risen in value against every major currency around the globe! It gained 20 percent versus the euro and 54 percent versus the Russian ruble!

Why the big move? In all the world, our economy is one of the best and we are the only ones raising rates. Both of these make our dollar more attractive to global investors.

With so many countries lowering rates to stimulate growth, it is possible their economies will strengthen and the dollar’s rise will slow. Overall, this would be good news. It would likely help those that have diversified globally.

market graph

Does 2015 offer any clues as to what 2016 will bring? In 2015, the S&P 500 finished within 1 percent of where it started. This has only happened in 4 previous years (1947, 1948, 1978, 2011). What happened following those respective years? In 3 out of 4, the market was up more than 10 percent. The outlier was 1947. It was followed by another low return year and then came the double digit. Of course, there are no guarantees.

History does firmly support the value of diversification and investing over the long run.

 

*Research by SFS. Data from Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500, S&P 600, and Dow Jones Global are indexes considered to represent major areas of stock markets. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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Rising Rates Will Impact: Your Income Your Spending Your Investments

By | 2015, Money Moxie, Newsletter | No Comments

Federal Reserve (Fed) members are making plans to raise interest rates and it is going to affect your wallet! Individuals do not borrow from the Fed, so you may be wondering how it could impact you. The Fed’s rate increase will start economic ripples that are going to hit your income, your spending, and your investments.

The Fed
The Fed was established by Congress and signed into law by President Woodrow Wilson on December 23, 1913. It has two objectives: seek maximum employment and maintain stable prices. (It is a highly sophisticated organization with over 300 Ph.D. economists.)

In simpler terms, the Fed is less like a surgical tool and more like a hammer. A hammer is blunt and its impact can be powerful. It doesn’t perform a lot of functions, but it is extremely useful for the right problems.

The Fed has power to perform a limited number of actions. It can strike hard and fast because it does not need congressional approval and its officials are not elected. The Fed is not focused on individuals as its actions have worldwide implications.

Why the Fed Changes Rates
The purpose of changing rates is to influence decisions that will help control unemployment and inflation.

In a slow economy: If spending decreases then companies become less profitable and may choose to layoff workers, which will further decrease spending and profitability. The Fed will try to reverse the cycle by lowering rates. When the Fed rate changes, other rates follow. This may encourage spending as it makes it cheaper to borrow for education, cars, homes, etc.

In a healthy economy: When the economy is thriving and the job market is good there is a lot of pressure on companies to raise wages. Confident consumers will spend more even if prices rise a little. When prices increase beyond a “healthy rate” of around two percent, the Fed gets worried. It may raise rates to decrease borrowing and spending.

Rates will Rise
Rates have been low since 2008 when the Fed brought short-term rates down near zero percent. Those who were able to borrow benefited from low interest rates. Right now the Fed is not worried about price inflation, but it does want to get rates back up to “normal.”

bag of money

Your Spending
The result will be higher rates when you take out a mortgage or get a loan for a new car. Anything with a variable rate, like some credit cards, will probably see an increase. Debt is going to get more expensive. Paying debt off and living within your means will be important.

Your Income
The labor market is improving. Many companies have announced plans to raise wages for workers, but the expected improvement has not yet hit. It’s coming!

briefcase

Wage growth was just around 2 percent in the last year and the Fed believes the country is headed towards 3.5 percent. This is good news for workers and it gives the Fed confidence to slowly raise rates to normal. However, if wage growth is too high the Fed will become uncomfortable and will really drop the hammer down—acting quickly, with force just to make sure prices don’t get out of control.

Your Investments
Back in 2013, Ben Bernanke, then Chairman of the Fed, suggested the Fed might end (taper) its stimulus. The stock and bond markets went crazy! The event even has a name: “The Taper Tantrum!” In the end, the Fed continued its stimulus.

The Fed is unlikely to catch investors by surprise when it finally does raise rates. Its members have been quite open about its plans and the economy is able to withstand a very gradual rise in rates.

percentage

Investors should expect more volatility, but in spite of the choppiness, the returns should still be positive. That’s what we have seen in the past.

Prepare Your Personal Economy
Make sure you are saving some income for rainy days even if it means cutting back on a little spending. Make sure the risk you are taking in your investments matches your ability and willingness to handle it. Finally, align your portfolios for the future.

Will the Fed hike rates in September? Will it be just 0.25 percent? How long will the Fed wait to make its next move and will it go too far too fast? The answers will be “data dependent,” a phrase the Fed members have been using lately. It will depend on U.S. economic growth, wage growth, and price inflation.

A gradual economic improvement will allow time to digest the news and act slowly—waiting months between each rate increase to see the impact. There are no signs of overheating for now. If that changes, the Fed is not going to sit idle. It would have to act. After all, to a hammer, everything looks like a nail.

 

*Research by SFS. Data from public sources. This is not a recommendation to purchase any type of investment. Investing involves risk, including potential loss of principal. The S&P 500 index is often considered to represent the U.S. market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

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Powerful Performance

By | 2014, Money Moxie, Newsletter, Viewpoint | No Comments

Economic growth in the United States was slow last year as the federal government dropped one potential bomb after another. However, none of these exploded and U.S. stocks had their best year since 1997. With all this positive momentum would it be too much to ask for an encore?

In January we escaped a close call with the fiscal cliff. Then came sequestration. By May, Ben Bernanke had dropped another bomb: tapering. Before the end of 2013 we endured a government shutdown.

Duds

Interest rates shot up last year with fear the Federal Reserve (Fed) would slow its bond-buying program. In 2014, this action is slated to become a reality.

Each month the Fed plans to slow its purchases by $10 billion. As it does, let’s keep in mind that any purchase is extra stimulus to the economy. The Fed is still flooding the economy with money. Some may compare this to pushing on a string, but the last few years have helped validate the phrase “Don’t fight the Fed!”

As the Fed becomes less involved as a driver of economic growth we may see more ups and downs in the stock market. In all likelihood, the coming year will be more volatile than last year.
When the next drop comes, let’s keep in mind that it is perfectly normal even in a healthy market to have some hiccups. A fall of 10 percent in stock markets occurs on average about once a year. These drops can even be healthy for long-term growth.

According to the Wall Street Journal, strategists believed the economy would slowly improve and the market would rise 8.2 percent in 2013. It rose 30.
This year, the economy is expected to grow faster, but predictions for stocks are more moderate.

The driving forces of growth should be similar. Domestic energy production is still rising. The housing recovery is underway. Employment is improving. Wages are expected to rise and changes in consumer spending are trending in a positive direction.

Improving economic growth does not necessarily mean more stellar stock returns. Sometimes the two can be out of sync as investors look to the future for something to get excited about. Nevertheless, stocks and the economy are closely related and the economy is still heading in the right direction for now.

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