At first, everybody was excited to learn that the Federal Reserve had dropped interest rates so low. They immediately thought about their mortgage rates and how low loan rates might go and how that could help the economy. We thought it was time, now, to talk about the coming months where people are starting to ask about their income and what interest they are making on their money. When Greg Powell started his career in the business in 1981, the 30-year Treasury rate was at 14%. Today that same rate is 1.4%. If you ever visit the office at Fi Plan partners, you will see a bond issue hanging on the wall that Greg did when he was the Head of Public Finance in his early years. This was his first bond issue ever and it was in the town of Loxley, AL. It was paying 9.5% tax-free at the time. Think about that. Mortgage rates were in the double digits and here we are now, many years later, with interest rates around 0% and the 30-year Treasury paying 1.4%. What a difference time has made.
Dividends and income are important pieces in building investment portfolios. Going back to 1982, dividend income accounted for over 25% of the annualized total return of stocks. Right now, over 70% of S&P 500 companies have dividend yields greater than the 10-year Treasury. The 10-year Treasury rate currently stands at 0.66% and the 30-year Treasury stands at 1.42%. The average yield of the S&P 500 is 1.96%. So obviously stocks are riskier than the treasuries. For some investors, looking for income in this market, there is no alternative because right now stocks and corporate bonds are really the only places to get significant yield right now. One of the reasons that stocks remain attractive in portfolios is because of the income that they produce. It’s one thing to say you need to borrow money at these rates, but it’s another thing to say that you need your portfolio to be generating income for you. People that are retired or looking to retire fall under this category. This emphasizes the importance of the Financial Blueprint that we do here at Fi Plan Partners. Whether you are close to retirement or already retired, we look at how to generate that income for you to live off of. Moving forward we are going to be keeping a close eye on this because, right now, the forecast is that we do not see rates going up anytime soon.
Inflation vs Deflation
Over the long term, you really want your money to at least keep up with inflation so that you are not losing money by investing. Traditionally speaking, the 10-year Treasury long-term government bond yield is very safe, and you want to at least be able to get your money back net of inflation. With extremely low rates last week, we saw the 10-year Treasury yield drop from .9% to 0.7%. Interest rates can continue to fall, but surely, they are not keeping up with inflation at those low rates. However, we got some interesting points from both the consumer price index and the producer price index for May. Those price indicators fell which indicates deflation, not inflation. Even though at rates are as low as a fraction of a percent, you are still outpacing inflation. It’s just that you’re not getting a lot of return out of it. Without inflation, there is no push to get interest rates higher because even at zero, if you have deflation, interest rates are keeping up with the cost of money. This is something we are watching very closely. If people see all the government stimulus, all the money being issued and spent by the Federal Government, the treasury, etc., surely that will cause inflation. As we saw the economy reopening, month-over-month, and May vs April, prices did not rise like expected. Prices actually continued to fall. Even though the market’s reopening and even though we put a lot of stimulus into the economy, typically that would be indicative of some inflation coming down the road, but we are seeing the opposite which is deflation. Long-term deflation can be negative on portfolios because there is no interest rate, no yield, and no alternative. Investors are then forced to take on more risks than they’d be comfortable with just to get any kind of interest or return because you’re not getting anything from the treasury.
Global Economic Health
We’ve seen interest rates get extremely low. In fact, in some of the European countries, we’ve seen negative rates. At the same time though, the stock market rallied due to all of the stimulus that’s taken place by the Fed and through Congress. For us to continue moving forward and seeing a strengthened economy and a strong recovery, a couple of things must happen from a global standpoint. A large internet store consulting firm looked at the 12 largest economies in the world, including our own. For us to really turn this around you would need to spend an equivalent, either through financial monetary policy, public policy, or both, above 10% of GDP level and quickly. The good news is most economies around the world in that top 12 have done that already and that money continues to work itself through the system. We want to remind viewers that it’s not just the U.S. There are a lot of economies around the world that are really trying to prop this floor up. We are seeing everything taking place on those 12 economies that are needed, trying to create a stimulus to get things going. The economies can take off but it will still take a while before the interest rates start moving back up. It’s a building process through all of this for everyone.
Initial Public Offerings
We have seen a recent surge in initial public offerings or IPOs for short. This is where companies go public to raise more capital for their companies. What we are seeing during this pandemic is a lot of bankrupt companies and private equity-backed companies starting to come to the forefront. Why does this matter to us as investors? We are starting to see a lot more participation in the markets which is encouraging and could help with consumer confidence. It will be important to keep an eye on them to see if this trend continues throughout the remainder of the year. It’s going to give us a good indicator of the optimism in the market and is a great way for companies to raise capital and to grow their business.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.