Given that I’ve been declared the world’s hardest person to shop for, my family finally threw in the towel this year and gave themselves an ice cream maker for my birthday!
We’ve particularly enjoyed that magic moment when the machine’s relentless churning begins to transform our mix into real ice cream. It’s a moment filled with sweet anticipation that’s been a welcomed break from the type of churning I’ve seen in financial markets in 2015.
Since the start of the year, stocks as measured by the S&P 500 index, have churned sideways, producing a small gain of less than 2%. And, bonds, as measured by the Barclay’s Aggregate Bond index, have declined a little less than 1%. Taken together, it’s not uncommon for a balanced portfolio to show close to zero return for the first half of the year.
The most cited culprit of this unproductive churn is the Federal Reserve’s public hemming and hawing about the future path of interest rates. Much as asset prices over the past six years have been positively impacted by abnormally low interest rates, the anticipation of the eventual rise in rates is now producing a chilling effect.
Think of interest rates as a barometer, of sorts. Interest rates, in part, set up the environment in which all assets are valued by investors. Since the Fed’s experimental zero interest rate policy began in late 2008, the Fed has imposed an artificial pressure on prudent investors to shun safety and embrace risk.
In my professional opinion, the Fed’s experimental policy of low rates was never about providing cheap money to spur demand for businesses to increase their productive capacity. Companies borrowed the cheap money, for sure. Yet, with much of it, they’ve repurchased massive amounts of their own shares and funded larger dividend payments. In essence, the Fed’s policy created a not-so-sweet mix of financial, rather than actual, engineering.
The recent churning we’ve seen in many financial markets – in stocks, bonds and currencies – is a sign the Fed’s mix is at that magic moment of change. The very nature of experiments – such as the Fed’s zero rate policy and their purchase of trillions of bonds – is the uncertainty of their outcome.
To pretend to know the outcome is pure hubris. However, to prepare and adjust is most certainly not. Unlike my homemade version of Ben & Jerry’s Sweet Cream, I get the feeling this Fed-induced churning of markets will probably not turn out nearly as tasty!
June 29, 2015 | Jason P. Tank, CFA
