Don’t Let Bernanke’s Prayers Derail Your Retirement Dreams
Ben Bernanke’s indecision is getting to investors and rattling the market. Unfortunately we are in the period, I have dubbed the “Post-earnings Nap”, that we have seen after most earnings seasons for the last few years. This has left people with nothing left to do but focus on the underlying economic issues, which today is whether or not the Fed will start to taper its stimulus program next month.
I began to notice new cycles emerging in the markets right after the crises. Stocks used to go down in nervous anticipation of corporate earnings, and then rise if they were better than expected. However, after the crises I began to notice a change. Stocks began to go up before earnings and down afterwards, regardless if they were good or not, and get sleepy and fall into nap mode, which is where we are now.
Of course Ben Bernanke and the Federal Reserve will only pare back their bond buying program, known as quantitative easing, if the economic conditions are slow enough to warrant it. There is no doubt they want to. The fed’s balance sheet is almost up to $4 trillion (yes, that’s trillion…with a T), and rising by $85 billion a month. As far as I was taught, debt has to be repaid, unless of course debt simply does matter. It’s nice to make the rules.
The problem is that I just don’t think they can end the stimulus. Not only is the economy addicted to it, but so is the market. The economy is certainly stronger than it was in the great recession, but not strong enough to stand on it’s own legs.
Another issue you hear little about is the “lack” of inflation. Data released this week showed core inflation up barely 1.2 percent in the 12 months through July, the lowest reading since November 2010. Analysts had expected that reading to fall to 1.4 percent from 1.7 percent in June. Although, the consumer prices released today did show a slight increase of .2%, which does have investors running scared because it is closer to their 2% annual inflation target. In the end, this will not be enough and inflation is still many months off.
Low or negative inflation, otherwise known as deflation, scares the bejesus out of the Fed because it can encourage businesses and consumers to delay spending, which directly undermines their efforts to boost consumption by lowering borrowing costs. As I discuss in Facing Goliath – How to Triumph in the Dangerous Market Ahead, consumer spending patterns decide the direction of the economy as well as specific industries and sectors. We can spot these trends by watching how people shift their buying habits as they age.
Regardless of their will, there doesn’t seem to be a way for the stimulus to end. This consumer spending malaise also looks like it will further slow down the economy 6-12 months out. This illustrates well with my forecast that we will have a reasonably strong 4th quarter that will spill in to the 1st quarter, and and a rocky 2nd half of 2014.
Although we look to have more gains ahead, this is no time to get complacent. After the 1929-1933 crash we had 4 strong years where the market rose 134% peaking in 1937, followed by another disastrous decline where the market dropped by over 50%, which was caused by the Federal Reserve cutting back on its stimulus programs too soon.
There will be a time to be invested, and there will be a time to be defensive in the months ahead, and of course money can be made in any market…if you know where to look! My job is to help ensure your finances are properly aligned with your retirement goals and dreams, to make sure your portfolio is getting the best returns with the least risk possible, that you have a retirement income stream that won’t go away, that Social Security is taken at the proper time, and that elder care is part of the planning so most or all of your nest egg is not destroyed by catastrophic illness. If your adviser is just talking to you about your investments, you are missing the boat!
…… and that’s where we can help. To learn more about our comprehensive financial planning approach, our powerful proprietary Investment Management Strategy and/or get a free second opinion on your portfolio, simply reply to this email, or give me a call for a no-cost no-obligation consultation today at (916) 925-890.