Government to the Rescue?

Once again, investors are hoping they will be rescued by our Federal Reserve.  This cycle has repeated itself several times since our last recession:  The Fed signals there will be no more easy money yet economic growth slows.  Investors become worried and the stock market sells off as financial conditions deteriorate.  The Fed then reacts by administering another dose of monetary medicine which reassures investors and pushes the stock market back up again.

During this most recent market downturn, valuations of safe havens such as government bonds have been pushed up in price to extreme levels, while the drop in price of risk assets like stocks created some value – although most likely not enough.  Unfortunately, the global economy has not improved and the outlook for corporate profits remains tepid.  The emerging markets continue to face debt problems as their commodity-based economies struggle.  Europe is also dealing with re-ignited financial stress as their banks are under-capitalized.  More importantly, however, investors may be losing faith that governments have the tools to handle their deteriorating financial situations.

With several versions and iterations of quantitative easing (QE) already administered in the U.S., Europe, and Japan, central banks have now begun to adopt a negative interest rate policy (NIRP) as their new monetary medicine.  In fact, almost 45% of all outstanding government bonds in developed countries now have negative interest rates.  NIRP could be viewed as an act of desperation by central banks signaling that previous doses of monetary policy were not sufficient to win the battle with deflation’s post-2007 powerful headwinds.  Nonetheless, interest rates and bond yields around the globe will likely remain lower than normal for longer than normal.

12-MFI Staff-RobertRobert J. Katch is the founder of Manchester Financial, an Investment Counsel/Wealth Management firm located in Westlake Village. For more information call 800-492-1107.

This material is provided for general and educational purposes only, and is not legal, tax or investment advice. For each strategy or option mentioned, there are detailed tax rules that must be followed.

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