To All Clients,
In February, Janet Yellen backtracked on her prior commitments to raising interest rates in 2016. In response, the equity market has performed well. As background, the equity market generally does not do well in a rising interest rate environment as enough money is pulled and then reinvested in bonds and other instruments where similar, and more stable, returns can be found. As low interest rates have been the norm for some time now, the only game in town has been the equity market and investors have done well. Effectively, returns have had more to do with the movement of money, and lack of investment options, than it does with the prospects of economic growth and market valuations.
Yesterday, Yellen reiterated her hesitancy toward raising rates as the Fed’s analysis indicated uncertainty in the strength of the economy. While the market reacted positively and rose to near 3-year highs after her statement, this is both good and bad news for investors. Good news, of course, because rising interest rates are bad for the market. Therefore, any delay, cancellation or reversal of rising interest rates is good for equity investors. However, this is also bad news. The bad news lies behind the reasons for not continuing with the rising interest rate policy. That is, if economic growth is not strong enough for the Fed to raise interest rates, it raises questions as to whether it is strong enough to invest in as well.
Adding to the complexity, the market’s valuation, like the market itself, is trading near recent highs. This, combined with slower than expected GDP growth and other factors, suggests the market will struggle to continue it’s recent pace.
As a result of all of the above, I am worried about the future direction of the market. As this applies to you and your account(s), I am looking at a couple options for your protection:
- Make no changes and see how events develop
- Liquidate some portion of your accounts and place the proceeds into cash and safer instruments
- Purchase defensive invesments which perform relatively well in a down market (ie, go down less)
- Purchase investments which perform well in a in down market (eg, inverse market ETF’s)
- Purchase insurance which protects your accounts in a down market
There are pros and cons to all of the above, including tax consequences. As I continue to analyze the market’s direction, I am also analyzing which investment approach is best for each client and their specific circumstances. As always, I will keep you informed as I make decisions on your behalf. For some of you, I may need 1-2 additional authorization forms completed to take action. I will let you know if necessary.
Also, as always, feel free to get in touch with any questions, concerns or thoughts you have on the above, or anything else at any time.
Richard Suvak MSF CFA
Eunoia Financial LLC