Weekly Update

Summary of Today’s Update:        

  1. Focus back on the FED and Janet Yellen as potential new Fed Chair to succeed Ben Bernanke
  2. Interest rates start to retreat again, bond prices rise-30 Year Mortgage at 4.3% vs. 4.37%
  3. Equity/stock prices stretched even more in recent week
  4. Allocations and outlook remain the same: Cautious and still expecting a stock market correction at any time

Continuity-Yellen merges onto the Ben Bernanke Highway

Though we’re still measuring the impact from the government shutdown on the economy, the drama we experienced in October is fading into the rearview mirror, and the spotlight is returning to the Fed and economic activity.

Various Fed officials have offered their views on the economy and the $85 billion in monthly bond purchases by the central bank (various sources, including Bloomberg, Reuters, Atlanta Federal Reserve), creating daily wiggles in trading. The focus this past week, however, fell on Janet Yellen, who has been nominated to replace Federal Reserve Chairman Ben Bernanke when his term concludes in January.

On Thursday, Yellen testified before a Senate committee, offering her prepared remarks and answering questions about how she might lead one of the most powerful institutions in the world.  Although she did not provide explicit details as to when she might want to begin dialing back the monthly bond purchases or start hiking short-term interest rates (that was not expected), her comments strongly suggested she will continue many of the policies initiated by the Bernanke Fed.

Calling the central bank’s efforts to boost hiring an “imperative,” Yellen vigorously defended the Fed’s low-rate policy that has been crafted to spur economic growth (Reuters).  Yellen acknowledged there has been some improvement in the unemployment rate, but she said the labor market and the economy are performing “far short of potential.” In other words, she sent a clear signal that short-term rates aren’t expected to change any time soon.  In a departure from Bernanke, however, she said she could envision using monetary policy if asset prices become misaligned, i.e., bubbles form. But she conceded that using monetary policy in such a fashion would be a “blunt tool (live testimony CNBC).” Of course, the difficulty that arises – how does one determine that asset prices are too high?

Markets re-align thinking with the Fed:  Take a look at the chart below. The 2-year Treasury is a good proxy for where investors believe the fed funds rate, which currently resides near zero, might be headed.


Repeated assertions by Fed officials, the lack of any tapering in bond buys at the September meeting, the nomination of Yellen to head the Federal Reserve (she has consistently advocated policies to support economic growth at the expense of savers), and her testimony on Thursday have all contributed to expectations the Fed won’t soon shift course.  Mortgage rates have moved to an average of 4.30% today from last week’s 4.37% for a 30 year fixed rate mortgage.  (Bankrate.com)

For the time being, bond prices and yields have steadied and any expectations for a fed funds hike next year, which would affect short-term rates such as CDs, have diminished considerably.  It has also provided fuel for the latest advance in equities.  The further advance of the major stock indices gives us even more concern for a potential stock market correction at any time, and possibly greater than originally expected.  We remain underweighted in stocks for all risk levels and continue a cautious approach moving forward.  We hope to take advantage of a decline in stock prices when and if it occurs.  We will monitor the situation and keep you posted.

We wish you all a great week ahead, and hope you are planning to spend some additional time next week with family and friends for the Thanksgiving Holiday.  As always, please don’t hesitate to call us at any time if you have any questions, or if we can be of further service in any way.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

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