What's On Tap..

What's On Tap..

A lot has been written over the past several weeks about the 7th anniversary of “the bottom” in the stock market. As the Federal Reserve embarked on QE, the naysayers were in full force declaring the dollar’s demise, gold’s rebirth and runaway inflation. Funny—just the opposite occurred. The dollar strengthened substantially, bonds and stocks both rallied, and inflation lay dormant.

Seven years later the story has changed, yet the forecasts of gloom and doom remain. Now the focus is once again on the Federal Reserve and its plans for raising the Federal Funds rate. Will it be 2, maybe 3 (See our musings on the Fed in past What’s On Tap issues)? I am not going to give you my thoughts on the Federal Reserve. Nevertheless, I am relatively certain that rates will go up. Can you imagine another time in history when unemployment would be under 5%, wages would be rising, and the Fed’s inflation gauges would be rising, and the ten year treasury would be anchored under 2%? I am only 47; however, this does not seem plausible.  If someone put you in a vacuum and gave you this economic backdrop and asked you what you thought the 10 year Treasury Yield was, what would you answer?  Would you believe that yields are below 2%?  If your answer is NO, then you can understand why the Fed is likely very nervous.   We continue to believe gradual normalization is a healthy and welcomed long term process.

The beneficiaries of the bond bull market and lower rates have been the holders of the 60/40 balanced portfolio. From 1982-2014, an average 60/40 portfolio averaged 10.89% a year. Ten year treasuries averaged 8.41%. With the ten year treasury now yielding 1.9% and the thirty year treasury yielding 2.6%, one does not need to be a math major to know that it is virtually impossible for the 60/40 portfolio to achieve the returns in the future that it has in the past.

Obviously, this creates a problem for your clients who have been accustomed to these higher returns and have probably run simulations with these outsized numbers. And yet, despite the obvious math, investors are still pouring money into fixed income.  We know that the bull market in bonds will end eventually. Thus, it is crucial for advisors to seek alternative strategies to balance portfolios and create sustainable income. At Braver, strategies such as Dividend Income and Tactical High Income seek to provide investors with reliable and sustainable income while hedging against higher rates.

This morning's March nonfarm payrolls report continued to show strength in employment and wages.  Our early read on this data continues to support our thesis towards more normalization as we proceed through the year.

 

 
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                                                     Stephen E. Johnson, JD, CFP®, CPWA®
                                                  Portfolio Manager, Fundamental Analyst
 

  

 

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