Bonds. Buyer Be Aware!
THE STOCK MARKET
Yesterday the Dow Jones and the S&P 500 set new records. I recommend my clients rebalance their stock/equity portfolios and re-allocate profits to lesser performing portfolio investments or a short-term bond fund to protect against falling bond prices. Here are the Treasury rates as of today:
Today* August 2020*
5-year Treasury Rate .84% .27%
10-year Treasury Rate 1.62% .62%
20-year Treasury Rate 2.27% 1.06%
30-year Treasury Rate 2.37% 1.27%
*Treasury rates from https://www.multpl.com/30-year-treasury-rate
These rates indicate two things:
Inflation may be on the horizon once the economy starts to recover.
Bond prices are going to crash downward.
The financial media often forgets to inform the public that bond prices have an inverted relationship with bond interest rates. When interest rates go up, bond prices fall.
Vanguard believes that this bump will be transitory, in part because of base effects or low year-earlier comparisons, and that structural forces will keep full-year U.S. inflation below the Fed's 2% target. Vanguard analyst noted, too, that the Fed in 2020 adopted an "average inflation targeting" strategy, allowing inflation to exceed its target without fostering a rate hike as long as inflation averaged 2% over time.
"There is a risk for portfolios," Hirt said, "that in a well-supported policy environment, the eventual vanquishing of the pandemic unleashes strong demand and 'animal spirits' that could influence inflation psychology, pressuring the Fed to act sooner than currently anticipated." "Such a scenario could engender capital losses in bond portfolios and remove some justification for the higher valuations currently supporting equity markets."
One of the most disturbing aspects of market downturns is the fact they are out of your control. Markets move based on numerous variables that no one person can meaningfully control or even fully monitor. And when stock prices falter, the resulting steady drumbeat of adverse news reports can drive many people to flee the markets out of fear (and miss out on potential gains as financial markets regain their strength). But when others are pessimistic, you can reframe the situation as one of opportunity. Namely, you have the power to follow these suggested actions—which historically have resulted in success weathering market lows.
Tune out the noise.
It's okay not to check your portfolio balance when the market is falling. Turning off the financial news might be wise if it keeps you from making mistakes based on emotional decisions.
Revisit your asset allocation
If you happen to be near retirement or in retirement, or if you lose sleep over downturns, you may need to reevaluate your risk tolerance. Together, we can figure out the balance of stocks and bonds best suited to your comfort level with risk and other personal circumstances.
Control what you can:
Costs Expenses eat returns, and their bite is excruciating during market corrections. We can explain options for removing high-cost investments from your portfolio in ways that minimize the taxes due from their sale.
Set realistic expectations.
U.S. stock and bond markets have posted remarkable returns in the past few decades. Statistically speaking, it would be prudent to expect lower returns in the future. Together, we can develop a plan that still achieves your goals despite potential headwinds of lower returns.
Downturns offer case studies in how different asset-class and sector exposures can help to insulate your portfolio. Having conversations about risk tolerance, as mentioned above, allows us to understand better your investing style and what's most important to you. With this greater insight, we can go over-diversification options for your portfolio that blunt the impact of downturns while putting you on track to achieve your financial objectives.
Last week the government passed the 1.9 trillion dollar pandemic relief bill. The question is, "How do we pay for this? The present administration hopes that a revied economy with stimulating growth in GDP to off-set the debt created by the pandemic relief package.
Vanguard Chief Americas, Roger Aliage-Diaz Economist calculations based on Thomson Reuters Datastream data believe that it is possible to manage the pandemic's debt.
Mr. Aliage-Diaz states, "As unique as those figures sound, most policymakers and market participants understand that debt sustainability—the cost of servicing debt compared with economic growth—is far more important than the cold, complex headline number. In that respect, although the health shock led to unprecedented emergency spending, our low-interest-rate environment is a favorable backdrop. It's more than conceivable that developed-market economies can grow out of their newfound debt.
With solid yet realistic growth rates in coming years as economies bounce back from pandemic-induced contractions, we could see debt in these economies returning to pre-COVID levels by the end of the decade. Moreover, muted growth assumptions are enough to put the debt on a sustainable downward trajectory even more if we learn to control government spending. Only time will tell the outcome of this pandemic aid.
*To my readers' full-disclosure purposes. I am an investor in Vanguard mutual funds.