The Federal Reserve announced on September 13 it would once again (surprise, surprise) engage in another round of quantitative easing in an effort to stimulate the economy. This time they will buy $40 billion per month of mortgage-backed securities and continue to maintain their Operation Twist program in which they swap shorter maturity holdings for longer bonds. Together, these two programs will add $85 billion in long-term bonds to the Fed’s balance sheet each month.
They also announced that QE3 would be open-ended unlike QE1 and 2 which had specific end dates. Maybe this is to avoid announcing QE4, QE5, QE6 - you get the picture. Additionally, they are extending plans to keep short-term interest rates “exceptionally low” until mid-2015. The goal of all of this is to stimulate spending and increase jobs. Interest rates are already so low it’s hard to imagine this will do much good, but the stock market and the housing industry sure like it. Retired investors, who may have no mortgage to refinance and may be dependent on interest income, can’t find too much to celebrate.
The economy’s growth rate is slowing as evidenced by successively lower GDP numbers. Second quarter GDP was revised dramatically down to 1.3% compared to an earlier estimate of 1.7% and below the first quarter’s 2.0% growth rate. On a brighter note, the Institute for Supply Management (ISM) survey reported improved September numbers for manufacturing and service activity, and the housing industry may have bottomed as record low interest rates are stimulating demand and stabilizing prices.
The jobs picture is about the same although the unemployment rate fell to 7.8% in September, down from 8.2% and below the politically significant 8% threshold. This was mainly due to a large increase in part-time jobs. The employment survey showed an unimpressive gain of 114,000 new jobs in September, but July and August gains were revised upward. Taken together, the two surveys indicate the employment situation is improving.
Common stocks generated impressive returns across the board during the third quarter as Europe did not drag down the markets as many feared. European Central Bank president Mario Draghi promised that the ECB would do “whatever it takes” to save the Euro, calming nerves, and the markets responded favorably.
Third quarter equity returns ranged from 5.40% for small U.S. companies (S&P 600) to 7.74% for emerging international stocks (MSCI EEM). Year-to-date performance ranged from 10.08% for developed international stocks (MSCI EAFE) to 16.44% for large U.S. companies (S&P 500). Twelve month returns ranged from 13.75% (MSCI EAFE) to an eye-popping 33.35% (S&P 600).
This just demonstrates that in order to effectively pursue long-term wealth creation there is no substitute, on a risk-adjusted basis, for a prudently diversified, low-cost investment strategy. This is Wealthview Capital’s investment philosophy in a nutshell.
Short and intermediate bonds delivered an acceptable 2.29% return for the quarter and an impressive 5.45% return for the year’s first nine months as measured by the Barclays 1-5 Year Corporate Bond Index. We include bonds in our portfolios to temper volatility, not as a substantial source of income, given the current low interest rate environment.
The first Presidential debate held on October 3rd, has made it a real horse race for the White House. Regardless of one’s political persuasion, we clearly need a functioning government in which both the legislative and executive branches put aside their dogmas and work together to regain our nation’s fiscal footing. Just as sand flows through an hour glass so does the time wane in which our nation’s structural problems can be addressed before we lose the ability to be pro-active.
We can start by addressing the so-called fiscal cliff that will result in huge tax increases and spending cuts if Congress and the President don’t deal with it. A return to the pre-Bush era tax policy will certainly cause a substantial economic setback, or worse. Many companies are unwilling to invest their cash hoards until they can determine what tax policies will be coming out of Washington.