Is This The Top for 2013?

Wednesday, the Federal Reserve will decide whether or not to cut back on their long-lasting quantitative easing policy. What does this mean and why should you care? This could drastically affect the low interest rate cycle that the equity market has been built upon since the end of the Great Recession, which basically marked its lows in the spring of 2009. So, could this be the top for the stock market? After a four-year bull market, changes in everyday interest rates, including many types of loans, have risen substantially. While consumers are already feeling the pain in items such as mortgages, the stock market has largely taken this move in stride and is closing in on its 2013 highs as of this week. Also important, this also changes the cost of capital for businesses around the world.

While the Fed is not officially changing their stance on interest rates, a cut back in the amount of bonds the Fed buys each month will essentially mark a change in policy. This new policy may change the landscape and here’s why: When longer-term interest rates begin to rise, this can make yields on certain bonds become more attractive. Since US Treasury Bonds are inherently less risky than stocks, and because the US government has a very low risk of default, this at least makes certain investors consider bonds as opposed to a riskier agenda of stocks. For the last four years, the choice was easy. With short-term bonds essentially yielding nothing, and the risk of the financial collapse falling further and further into the past, many stocks had higher yields than bonds. Plus, investors had the upside of price appreciation with a stock. Now though, with stocks more than doubling from their lows, there are few people that would tell you that they are the bargains that they were during the panic. In an ultra-low interest rate environment, the choice was pretty easy. Now, the market becomes more complex.

There is a further risk that the Fed created certain asset bubbles due to these low rates and we will only find out what skeletons are in the closet, once rates move up. This is the so-called, Black Swan effect, made popular by Nicholas Nassim Taleb in his best-selling book of the same title. Essentially, this phenomenon happens when no one expects it, and it occurs often in an emotion-driven vacuum like the stock market. Just because it’s never happened before, doesn’t mean it can’t, as we saw in the real estate collapse. A possible spot for this could be the bond market. Naturally, as stocks collapsed during the panic, a natural, safe landing spot for capital was the bond market. Now, longer-term bonds are falling apart as interest rates rise. Investors piled into bonds by the masses and now are feeling the effects. Another concern is emerging markets and the foreign exchange markets associated with them. As the Fed becomes more hawkish and capital is treated better here in the US, there have been massive outflows of capital from places like India and this has many worried. While I am not calling an end to the bull market quite yet, investors should at least start to become more wary. The ground under our feet is beginning to shift. These are the types of issues we examine at Financial Advisor Austin Wealth Management. For more information, visit our site or check out this post on Seeking Alpha.

Fool’s Gold or Here To Stay?

Now that the Dow has more than doubled from its low of 6,443 on March 6th, 2009, it’s probably a fair question to ask if it’s a good idea to keep putting fresh money to work in this market.  The bulls would say the conditions are still very good.  Interest rates are still very low and the Fed is still in a an accommodating position.  The bears say the ground is beginning to move a bit.  Longer-term interest rates have moved up more than a 100 basis points just in the last two months once Mr. Bernanke made a mere mention of any kind of decrease in QE.  While we’ve had scares over the last few years, including European problems and S&P downgrades, this is at least a little different.  Interest rates do in fact rule the world, so when they move, we should at least start paying attention.  While there is plenty of research to show that increasing interest rates at this stage of the cycle can still mean higher equity prices, we always need to keep in mind that past results are not always indicative of future results.  It has been discussed that much of the buying from this latest 6% downturn has been from retail investors, as many institutional investors are out for the summer or in light trading modes.  Just something to think about as many just blindly hand over money to the market in hopes that this 4+ year-old bull market has much more, in terms of upside legs.  Things have at least gotten a little more interesting…

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