Tips From Donna ( November Wesban Monthly)
by Donna Gordon on February 1st, 2016

Existing Home Sales Remain Strong  

 Existing home sales surged in September to the highest level of the recovery at 5.55 million units annualized. The year-over-year 3-month average growth stood at 8.3%, suggesting a continued strength in the existing home market as well. The demand for existing homes remains strong, and this is reflected in the low inventory levels that have been depleting for four consecutive months now. While existing home sales remain strong, the low inventory levels could potentially limit sales in the long run. Nonetheless, existing home sales are growing at a high single-digit rate based on the data released so far in 2015, which is good news considering that the existing home market actually contracted 3.1% in 2014. Overall, recent economic indicators suggest that the state of the housing industry remains strong, and that consumers continue to be confident about their long-term finances.
Fixed-Income Investors: Face the Facts   

All of the recent chatter about the future direction of interest rates has caused a great deal of angst amongst investors, many of whom are either saving for or spending their way through retirement and are desperately looking for reliable sources of investment income. The facts facing fixed-income investors today are harsh. Rather than ignore them or try to defy them by investing in some freshly minted cure-all, investors should stand and face them.
Fact 1: Interest Rates Are Low. We are most likely in the twilight of a decades-old secular bull market in bonds. As of Sept. 28, the yield on the 10-year U.S. Treasury stood near 2.1%. After accounting for inflation, the real yield on the 10-year Treasury was about 0.3%. Interest rates are historically low. This is bad news for savers. Low yields portend low future returns; manage your expectations accordingly.
Fact 2: Interest Rates Will One Day (Maybe Soon) Head Higher. Based on current 30-day federal funds futures prices, market participants are betting that the Federal Reserve will raise the federal-funds rate sometime late this year or early 2016. Of course, this is hardly a done deal. There will be plenty of economic data that will emerge in the coming months that could push back the timing of a rate hike. Also, if and when the Fed raises rates, there is no telling 1) the magnitude of the hike, 2) the timing and magnitude of subsequent increases, or 3) whether the rate hike could send the economy into a lurch and cause the Fed to subsequently reverse course. We are in uncharted waters.
Fact 3: Rising Rates Drive Bond Prices Lower. Bond prices have a seesaw relationship with interest rates. As rates go up, prices go down, and vice versa. When rates rise, it will place downward pressure on bond prices. Just how much pressure will chiefly depend on the magnitude of the rate increase and the bond or bond portfolio’s duration (holding all else equal, there are other factors to consider, of course).
Facing these facts, some investors have been behaving badly. These circumstances have been a difficult pill to swallow for a growing class of investors that needs reliable sources of income now more than ever. Many investors are attempting to defy the odds, reaching for yield and piling on risk in the process.
The Fed’s policy has pushed many investors into smaller, more-volatile areas of the market. We’ve witnessed this in the mushrooming of assets in non-traditional (and much riskier) fixed-income strategies, such as high yield. In all of these cases, investors looking to protect themselves against one type of risk are simply loading up on another one. In the process, many seem to be forgetting the basic case for owning high-quality bonds in an appropriately diversified portfolio. They may serve some of investors’ most crucial needs, specifically: capital preservation, diversification, and income generation.
As discussed earlier, the expected returns of a diversified portfolio of high-quality bonds today are, to put it lightly, unappealing. That said, bonds still play an important role in a diversified portfolio. Quality bonds are typically less risky than stocks and can act as a good diversifier of equity risk, even as rates change.
Past performance is no guarantee of future results. Diversification does not eliminate the risk of experiencing investment losses. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest. With corporate bonds an investor is a creditor of the corporation and the bond is subject to default risk. Corporate bonds are not guaranteed. High-yield corporate bonds exhibit significantly more risk of default than investment grade corporate bonds.
Modest Slowdown in Overall Employment Growth  

 The U.S. economy added 142,000 jobs in September, and the August report was adjusted down considerably from the originally reported 173,000 to a less impressive 136,000. The unemployment rate remained unchanged at 5.1%. The year-over-year employment growth, which is a less volatile indicator of employment strength, decreased modestly from an impressive 2.3% pace in February to a slower-but-still healthy 2.0%.
Overall, the September employment report was disappointing and had many investors worried that the U.S. economy might be deteriorating. While a modest slowdown cannot be denied, it is worth noting that the current pace of employment growth is still faster than what we’ve experienced in the first half of 2014, indicating that the growth has not fallen off the cliff.

Posted in The Wesban Monthly    Tagged with no tags

no tags