How fast things can change. After surprisingly strong employment and retail sales reports we are hearing about a V-shaped recovery from what must have been the shortest recession ever.
Few predicted a V-shaped recovery. Some pictured a “W,” some a “U” recovery, some none at all (an “L”). Time will tell.
How does the Fed see it? First, I should mention that the Fed’s record as a forecaster is, to be kind, checkered. Alan Greenspan was three years early with his comment about “irrational exuberance” and he kept interest rates too low for too long, creating a mortgage fiasco.
Ben Bernanke assured us in 2008 that the mortgage problems were focused and well contained. Not exactly. He went on to predict accelerating growth after the financial crisis. What we had were eight years of tepid growth.
So what does the Fed see now? The Fed expects the unemployment rate to fall to 9.3% by year-end, then 6.5% next year and 5.5% in 2022. In the 1980s a 6% rate was considered “full employment” and unlikely to be reached. It fell to 3.5% earlier this year. The Fed sees GDP shrinking 6.5% this year but gaining 5% in 2021 and 3.5% in 2022. There’s more.
The Fed will keep interest rates at zero at least through 2022. That means money-market fund yields will be close to nothing. Short-term bonds and CDs will return a touch more. That is not good news for savers, but they must be used to it by now. The Fed will continue to purchase Treasury bonds and mortgage-backed securities in huge quantities. They will also do whatever is necessary to protect the economy.
What are investors to make of all this? That depends. If your goal is to generate investment income in bonds you will need to settle for token interest or take more risk. That’s your choice.Everything yields more than Treasurys, but investment-grade bonds yield just a bit more. Junk bonds yield much more, but there is the risk. We listed our favorite preferred stocks in the May 15 column.Our favorite dividend paying stocks include AT&T, Verizon, Amgen, Merck, and others. Most will raise their dividends this year and many already have.
After rising 36% in three months the stock market is vulnerable to any news that is less than great. Sell-offs can be swift. Rallies, too. Don’t make too much of them. Stay the course.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at www.VomundInvestments.com or by calling 775-832-8555. Consult your financial advisor before purchasing any security.