Tag Archives: interest rates

Interest rates around the world.

And you think that interest rates are low here?  You should be Japanese.

The Japanese people are paying the Japanese government to buy government bonds.  The rate on 10 year bonds is minus 0.159%.  Lenders are willing to pay the Japanese government for the privilege of getting back their principal, ten years from now.

Things are just slightly better in Germany.  The German government bond is yielding 0.025%.  That means if you lend the German government $1000 today they will give you back $1002.50 in ten years.

UPDATE:  June 14th, the morning the rate on the German bond has dropped to zero.

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Oh No They Didn’t!

The big financial news of the moment is that the Fed decided not to raise interest rates, though 13 of 17 Federal Reserve officials say that they see a rate hike by the end of the year.  In their statement, they cited “recent global economic and financial developments” as their reason not to raise rates today.  However, Chairwoman Janet Yellen cautioned that people should not “overplay the implications of these recent developments,” saying that they “have not fundamentally altered” the Fed’s outlook on the economy.  All of this leads us to believe that we are likely to see a similar media build-up around the Federal Open Market Committee’s (FOMC) December 15-16 meeting.  (There is another FOMC meeting scheduled for October 27-28, but at this point, there is no press briefing currently scheduled for that meeting.)

Whenever the Fed finally does raise rates, expect it to be a very SLOW process.  Ms. Yellen alluded to as much when she said, “the stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate.”  Charles Schwab’s Liz Ann Sonders provided the following chart, which bodes well for the stock markets (unless we are all wrong and the Fed suddenly starts hiking rates quickly):

Interest Rates

As we wrote just the other day, we expect the Fed to increase rates and would have preferred to see them do it sooner rather than later.  The rate increase is widely expected to be in 0.25% increments, which should not have any significant effects on the economy.

Following the Fed’s stand-pat announcement, the stock market actually declined slightly (and futures are down as we write this morning), indicating that their position is being interpreted as an indication that the Fed does not have total confidence in the strength of the economy.

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Dear Fed: Just Do It!

Get on with it already! Ever since the crash of 2008, the Federal Reserve has kept interest rates near zero. The theory was that low interest rates would stimulate economic activity. But we are now in the sixth year of economic recovery. The government tells us that unemployment is 5.1%. The average person buying bonds looking for income is treading water.  After taxes, and inflation they are slowly losing purchasing power.

Raising rates from 1/8% to 3/8% should be a no-brainer. The much anticipated rate hike by the Fed, perhaps as early as tomorrow, has everyone quivering with anticipation. Our suggestion is to ignore the announcement. There is no secret trading strategy that tells how to “play” the Fed’s announcement.

Let’s say the Fed does indeed raise rates by 0.25% tomorrow. How would the market react? There could be a sell-off. On the other hand the market could rally on the belief that the Fed thinks the economy is finally strong enough to allow a modest increase in interest rates. In fact, both could happen: a sell off followed by a rally.

Should the Fed NOT raise rates this could be interpreted that the Fed sees dangers ahead for the economy.

Our own position is that raising rates by one-quarter of one percent will have no actual effects on American economic activity. The basis for economic growth comes from the private sector. It will come from new drugs to cure diseases, new apps to make your life easier, more technology to increase the supply of oil and natural gas. The cost of gasoline has dropped to under $2.00 in our area, which has a big effect on the budget of the average family. This, not a modest increase in interest rates, will have a bigger impact on the economy than anything the Fed does in the short term.

We have no idea what the Fed will decide and no one else does either. No matter what happens, short term gyrations in response to the Fed are just noise, distracting investors from the fundamentals. For those who believe in free markets and capitalism, what affects you and your portfolio happen far from Washington DC.

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Numbers, the Law of Averages, and the Dow Jones

As we wrote last week, volatility is back.  Two weeks ago today, August 20, saw the Dow Jones Industrial Average (DJIA) dip by 358 points.  Since then the stock market has taken investors on a wild ride.

We were wondering what the average daily price movement was during the past couple of weeks, and after a little research and some Excel wizardry, got the answer:

  • The last 10 trading days (August 20 – September 2) have seen an average move of 356 points in the DJIA.

Then we wanted to see what the DJIA did the 10 trading days prior to August 20:

  • From August 6 – August 19, the two weeks prior to this recent two-week period of volatility, the DJIA moved an average of 96 points per day.
  • The average daily price movement these last two weeks is more than 3.7 times the average price movement the prior two weeks.
  • Even more telling, from August 6 – August 19, there were 6 days that the index moved less than 100 points. From August 20 – September 2, there was only one such day.
  • During the month of July, the DJIA moved an average of just under 103 points per day, or less than a third of the average daily price movement these last two weeks.

DJIA Avg Daily Price Movements

(Another interesting tidbit that seemed to escape mention by the talking screaming heads on TV: despite last Monday’s big drop, both the DJIA and the S&P 500 closed up for the week ending August 28.  The DJIA was up 1.17% while the S&P 500 was up 0.95%.)

Eventually we will revert to the mean.  We are still not convinced that interest rates, China’s growth rate or currency movements are that big a deal.  Put another way, we do not think those things are enough to derail the slow “plow horse” economic improvement domestically.

We urge everyone to take a long-term view on investing and keep a cool head during bouts of market volatility.  We will continue to monitor the markets, economic conditions and our clients’ portfolios.  If you have any questions, concerns or comments, please do not hesitate to contact us!

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On Recent Market Volatility. An Open Letter to Our Clients.

And you thought we saw volatility last Thursday and Friday?…

It is normal to for you to wonder how all of this volatility affects your wealth.  As we are hearing it, China seems to be the straw that broke the camel’s market’s back.  Other forces added to the weight, including uncertainty over the timing of the Fed raising interest rates and the Greek debacle.  However, we do not think that any of these things are cause for long-term concern regarding your portfolios.  If you are feeling some stress because of the recent market volatility, remember:

Stock markets are supposed to go up and down

There have been over a dozen market pullbacks of at least 5% since March 2009, so this isn’t unprecedented.  We all realize that stocks are inherently volatile investments, and we must accept the fact in order to earn the expected higher long-term returns.  You have all undoubtedly heard us preach asset allocation and the importance of having a long-term, strategic view.  Your portfolio is invested in a model based on your unique financial and personal circumstances.  It is important to take the long view and realize that it is typical for bull markets to have corrections of 5% – 10%.

Market timing is a sucker’s game

None of us has a crystal ball.  Not even the traders and speculators on TV that want you to think that they do.  Luckily, you do not need a crystal ball to be a successful investor.  In times like these, it is best to keep your cool and stay invested.  Studies consistently show that missing just a few days of strong returns can affect your performance dramatically.  It is important to stay disciplined and not make short-term trading decisions based on fear and emotion.

Your portfolios are properly diversified

This is our most important point.  As we mentioned, we have invested your money in an appropriate allocation for you, so those investments that have not done as well as the stock indices the past couple of years (looking at you, bonds) should help cushion the blow from this market correction.  That is exactly why they are in there.  Having a mix of different types of investments is like having shocks and struts on your car – these things provide a smoother and more stable ride for your portfolio.  When the stock markets are going great, these other investments do cause drag, but we do not invest to beat an arbitrary benchmark, rather we invest to help you achieve your financial goals with the least amount of risk possible.

The things that are causing this correction are just noise

China is slowing.  So what?  To say that their growth rate is slowing is admitting that they are still growing, just at a slower pace.  Did anyone really expect them to grow at 20% per year forever?  Moreover, if you look at it from a numbers perspective, exports to China only account for 0.7% of U.S. GDP.

The Yuan is falling.  Just a few months ago weren’t the talking heads lamenting the thought of the Chinese yuan as the world’s new reserve currency?  Now that talking heads who brought you that idea are being proven wrong, they want you to believe that this is supposed to be bad, too?  Which is it that we are supposed to fear again?  We wrote a blog piece about this last week, so we won’t go into great detail rehashing it here, but our general reaction is, again: So what?

The Fed is going to raise interest rates. (Eventually.)  It was not that long ago that tapering was supposed to bring financial ruin to us all…  Look, we all know that the Fed is eventually going to raise rates.  We can argue about the timing, but whenever it finally happens and the federal funds rate increases by 0.25%, does anyone really think that will keep Apple from introducing the latest re-iteration of their products?  Or keep anyone from buying them?

We realize that we have been having some fun with things that may cause some of you serious concern.  What we do not take lightly as your advisors and financial fiduciaries is the amount of concern and care we place on your financial well-being.  In times like these, it is important to stay calm and avoid making hasty decisions that could harm you financially.  We will continue to monitor your portfolios with vigilance, and as always, please do not hesitate to contact us if you have any questions or concerns.

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The right time to invest?

time to invest

Is this the right time to invest?  Good question.

Here’s another good question:  when is the best time to plant a tree?
The answer:  “Now.”
Here’s a better answer:  “When you were a child.”

Time is our most precious resource.  A wasted moment is lost forever.  Trees take time to grow.  The same is true for wealth.

We are often asked “is this a good time to get into the market?”  The answer is that there is no better time.

Here’s why.

If you put your money in a savings account you might get about 1%.

At that interest rate it takes 70 years to turn $100 into $200.

If you could grow your money an average of 5% per year, that $100 would grow to $200 in 15 years.
If you can get 6%, it would take 12 years to grow to $200.
If you can get 7%, 11 years would get you to $200.
If you can get 8%, 10 years would get you to $200.

At 15% your money doubles every 5 years.

We are big advocates of people working hard for their money.  But we are just as insistent that money should work hard for them.  Why be a hard worker with lazy money?

Investing is one of those things that people put off.  But doing so wastes their most valuable resource:  time.

If you’re not happy with the way your money’s working for you, check out our website or give us a call.

No sales pitch, no pressure. Just good advice. That’s the reason we won the 2015 Suffolk Small Business of the Year award from the Hampton Roads Chamber of Commerce.

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Living on a fixed income has gotten a lot harder

At one time, living on a fixed income meant you were retired, received a pension and social security, and got some extra income from your savings. For our parents and grandparents, certificates of deposit, otherwise known as “CDs” were a guaranteed source of no-risk income. Back in 1981 you could put your savings in the bank and get nearly 18%. That was a period of high inflation when prices were also going up. But CDs and bonds paid investors high enough rates so that retirees were comfortable with putting their money into CDs or bonds.

But interest rates have been on a downward path since then. CD rates have dropped from about 11% in 1984 to 1% or less today.

CD rates history

 

Today, CDs and bonds, once the go-to choice of the thrifty retiree, pay a small fraction of what they once did, and provide very little income to supplement their other retirement income sources.
The Federal Reserve has been keeping rates close to zero for years to try to jump-start the economy, with limited success. But while it’s been good for businesses and home buyers who have have been able to borrow money at rates that we have not seen since the 1950s, the traditional saver has seen their income dry up, collateral damage of Federal Reserve policy.

Charles Schwab, in an article published in the Wall Street Journal states that:

U.S. households lost billions in interest income during the Fed’s near-zero interest rate experiment. Because they are often reliant on income from savings, seniors were hit the hardest. Households headed by seniors 65-74 years old lost on average $1,900 in annual income over the past six years, according to a November 2013 McKinsey Global Institute report. For households headed by seniors 75 and older, the loss was $2,700 annually.
With a median income for senior households in the U.S. of roughly $25,000, these are significant losses. In total, according to my company’s calculations, approximately $58 billion in annual income has been lost by America’s seniors since 2008.
Retirees depend on income from their savings for basic living expenses. Without that income, many seniors have taken on greater risk to increase the potential yield on their savings, or simply spent down their nest eggs. After decades of playing by the rules, putting off spending and socking away money, seniors have taken it on the chin. This strikes a blow at the core American principles of self-reliance, individual responsibility and fairness.

What’s a retiree to do? Let’s look at some of the alternatives that people on fixed incomes are being offered and what to watch out for. All of them involve risk that may not be readily apparent. There are traps for the unwary.

Continue reading

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The “Plow Horse Economy” Keeps Plowing

The stock market defied the bears again and rose despite mixed economic news. We are in the camp that believes that the economy and the market will continue its slow and plodding rise despite a brutal winter and government policies that make doing business more complicated.

That being said, we would not be surprised us if the stock market experienced a correction. In fact, we construct our portfolios with this possibility in mind. The world is full of surprises and events – either local or global – can cause a temporary disruption. One of the things that surprised many bond traders is that interest rates actually declined in the last year, catching many pundits off guard.

Moving ahead, conditions appear to favor actively managed portfolios. We constantly review our manager line-up and re-balance your portfolios on a regular basis to keep you – and all the rest of our clients – within the risk bands that you have established.

Year-to-date, most of the broad global market indexes are positive. In the U.S., the NASDAQ was the best performing stock index. Interest rates remain low by historical standards, meaning that money in savings and checking accounts is losing purchasing power. The rise of food and energy prices is causing a problem for those who bailed out of the market in 2008 and never re-entered.

If you have not yet visited our new website, please take this opportunity to go to www.korvingco.com and invite your friends to check us out. We welcome your comments and suggestions for ways we can be of greater service to you.

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Income Investing: Investors No Longer Taking a ‘Fixed’ Approach

While interest rates on bonds have risen slightly from the absolute bottoms, investors looking for income are still not satisfied with the rates that they can get today.  Adding to their concerns is the expectation that when the federal reserve slows “quantitive easing” interest rates will rise to significantly higher levels.  And that means that the bond they buy today will probably go down in value.

As a result, income investors are actually looking at dividend paying stocks to provide the cash flow that they need.  One other advantage of this strategy is that many companies have been raising their dividends regularly, something that bonds don’t do.

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