Dec 3, 2019
The markets continue to rally. Since last December's lows the market has climbed to new all-time high levels on the popular indexes. The Fed reversed course and cut interest rates as a result of global slowing due to the Fed perviously increasing interest rates 9 times since 2015. The reversal by the Fed rallied stocks through the first part of the year and then they treaded water until the bond market had a huge rally, pushing rates to inverted levels.
Recession fears worried the markets which were reflected in the bond inversion and rally in the utility and consumer defensive sectors. The increased rates made for a strong dollar, putting pressure on foreign manufacturing and economic growth globally. It wasn't until the Fed lowered rates further that global manufacturing PMI's began to stablize and industrial shares and yields reversed. The Fed cut interest rates 3 times during 2019 and stopped QT (quantitative tighening), recession fears receded, and stocks reached all-time highs on the major indexes. The markets and global manufacturing PMI's were telling the world that the higher dollar, supported by high U.S. interest rates and the QT, were creating problems around the world.
The Fed's interest rate cut and reversal of QT, a change from withdrawing $50 billion per month to adding $60 billion per month, pushed the market to recent high levels. The markets love an increasing supply of money and liquidity vs a withdrawal of money from the system.
Nov 5, 2019
Long-term bonds will be a drag on portfolio performance, especially in target date retirement plan accounts, in the years ahead. Target date portfolios increase the percentage of bonds each year until bonds move closer to 80% of the portfolio at the target retirement date. Using today's 1.75% 10-year bond yield as a starting point, interest rates will probably be higher in the long-term, making purchases now and for the next few years very unattractive! As interest rates rise, bond prices decline. During the last nearly 40 years, since 1981, interest rates have declined, pushing up bond prices as well as all other assests, including stocks and real estate. That will reverse to the detriment of long maturity bondholders especially. Contact us if you want to discuss why target date funds may not be a good option for the long term.