Bearish Politics Bullish Corporations
We’ve heard a lot about Watergate and the politics in Washington, D.C. lately. As investors it’s important to show that we are in different times. During Watergate, back in the 70’s, you had out of control inflation, turmoil in the Middle East, gas prices that had tripled, and a negative 3% GDP so when Nixon was being impeached the economy was pretty bad. Now, we have a great economy with great corporate earnings even in Europe, a good housing market and a good job market.
Politics – The Fed and FOMC minutes
As for politics, the Fed is a part of the government that is bearish. The FOMC minutes are coming out this week from the last Fed meeting. This is important, not because of interest rates but, because we believe that the short term rates going up have already been priced into the market. The Fed has a $4.47 trillion balance sheet. $1.8 trillion of that is in mortgages. When an investor or individual goes out to get a mortgage that is long term not short term. When a corporation borrows that is also typically long term. The Fed’s impact on the long term interest rates is with this very large balance sheet. Right now, based on dividends, they are buying $112 billion worth of bonds every year. How they reduce the balance sheet is the black box on what is going to happen. Individuals need to keep their eye on the long term rate. We feel like, the short term rate has been digested by the market already. It’s that long term rate that will impact individuals more so than the short term rate.
Politics – The Fed appointments
Ten years ago, the Fed was only $1 trillion in size, since then, it has quadrupled. On top of trying to make it smaller, President Trump has three upcoming appointments on the Federal Reserve out of the seven. Statistically, that is a major move. So not only are you trying to manage to it you are going to be appointing other people while you are doing it. It’s kind of like building the airplane while you are flying it. It’s hard to say how it will be unwound when we don’t know who will be doing the unwinding. Keep an eye on long term rates, especially mortgages.
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.
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