Central Bankers Pushing on a String

Last update on: Oct 24 2019

Investors are becoming complacent just at the time when they shouldn’t.

As bankers ramped up quantitative easing (QE) after 2008, many investors remained cautious. Surveys showed investors holding large allocations to cash as QE pushed the prices of stocks, bonds and other assets higher. Now, it appears investors are comfortable with the idea that central bankers will keep a floor under markets.

At the same time, central bankers are worried. Officials at the Federal Reserve are anxious to raise interest rates. They’re afraid with interest rates near zero and QE having been less effective after each phase, they won’t have any effective policy tools the next time the economy slows if they don’t raise rates now. The Bank of Japan already has reached that point. Easy money and near-zero interest rates haven’t been able to stimulate an economy that’s been depressed since about 1989. Central bankers in Europe and China also see limited reactions to their recent monetary policies.

At the same time, it appears that inflation finally is rising. We could return to an era similar to the 1970s, when economic growth was weak but inflation was rising.

The economy has seen most of the benefits from QE and easy monetary policies. Asset prices also have seen the benefits, pulling about 10 years worth of returns into the last few years. Going forward, without fiscal policy changes, we’re likely to have modest economic growth and low asset price growth. Low interest rates and asset returns will depress growth because investors won’t earn much from their portfolios.

It’s not a time for investors to be complacent. To earn reasonable returns without high risk, investors need to manage risks, have more balanced portfolios, and consider assets and strategies they haven’t used in the past. You also shouldn’t count on central banks to be able to support markets and the economy indefinitely.

The Data

There were some bright spots in the data from the last week.

Housing continues to perk along. New home sales continue to surge. September sales increased 3.1% annualized, though that is after each of the two previous months’ numbers were revised down. Even so, 12-month sales increased by 30%. The sales gains come with a 6.7% price increase over the last month and 1.9% over 12 months.

Pending home sales (which are of existing homes, not new homes) increased 1.5% for the month. That’s a solid bounce after being slightly down for 12 months.

The FHFA House Price Index also had a solid 0.7% increase for the month and 6.4% for 12 months. The S&P CoreLogic Case-Shiller House Price Index rose only 0.4% for the latest month and 5.1% over 12 months. The Case-Shiller index is broader-based and also is two months behind the FHFA Index.

Manufacturing also had generally positive or neutral news. The PMI Manufacturing Index midmonth flash rose from 51.4 to 53.2. That’s the sharpest increase in a year, and many of the components of the index were at one- or two-year highs.

The Richmond Fed Manufacturing Index still was a negative 4, but that’s half of last month’s negative 8. Overall, it indicates manufacturing in the region is limping along but not in a steep slide.

Last month’s Durable Goods Orders were revised higher, but this month’s orders registered a 0.01% decline. Excluding transportation, they increased 0.2%. A negative in the report is a 1.2% decline in core capital goods (and a 4.1% decline over 12 months). The core capital goods figure represents basic business investment, which has been weak for some time. Last month’s increase in core capital goods was revised higher to a 1.2% increase and gave hope that businesses finally were starting to invest for growth.

The non-manufacturing sector of the economy is doing well. The PMI Service Index midmonth flash increased to 54.8 from 51.9. Most components of the index were strong, though employment still is weak.

Consumer Confidence, as reported by The Conference Board, fell to 98.6 from 103.5. This still is a positive number and indicates households generally are positive and in good financial health. But the surge in confidence that occurred earlier this year has halted.

New unemployment claims declined by 3,000 after a spike of 14,000 last week. That leaves the weekly number and four-week average near historic lows.

The Markets

The S&P 500 is down 0.25% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined only 0.03%. The Russell 2000 tumbled 1.45%. The All-Country World Index declined 0.50%. Emerging market equities lost 0.85%.

Long-term treasury bonds lost 0.59%. Investment-grade bonds declined 0.75%. Treasury Inflation-Protected Securities (TIPS) lost 0.15%. High-yield bonds fell 0.37%.

The dollar rose 0.71%.

Energy-based commodities lost 2.29%. Broader-based commodities fell 1.75%. Gold lost 0.25%.

Bob’s News & Updates

Do you need gift ideas this year? Consider joining those who gave family and friends copies of the second edition of my book, “The New Rules of Retirement.” It’s the ideal, most up-to-date guide to any stage of retirement planning, even for those who’ve been retired for years. To receive signed copies at $25 per copy, send a check to Retirement Watch, LLC, P.O. Box 222070, Chantilly, VA 20153. We pay the shipping. Include your return address and instructions about how I should dedicate any books that you want me to sign.

Some Reading for You

Genworth is being acquired, and that could improve the market for long-term care insurance.

Here’s an entertaining tale of one man’s engagements with fake IRS scammers.

Is a civil war brewing at the Federal Reserve?

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.



November 2020:

Congress Comes for your Retirement Money

A devastating new law has just been enacted, with serious consequences for anyone holding an IRA, pension, or 401(k). Fortunately, there are still steps you can take to sidestep Congress, starting with this ONE SIMPLE MOVE.

Log In

Forgot Password