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Historically, What Do Stocks Do Before And After The Fed Starts Hiking Rates?...

Sooner or later, the Federal Reserve will begin normalizing monetary policy, which means higher interest rates are coming.

This has investors rightfully worried because higher rates mean higher interest costs, which should be bad for profits and ultimately stocks.

Deutsche Bank Chief US Equity Strategist David Bianco examined the history of Fed rate hikes and their impacts on stocks.

"Stocks typically sell-off on the first of a series of rate hikes, but the magnitude and duration of the sell-off depend on conditions," Bianco writes. "During early cycle hikes the initial sell-off was generally small, quickly recovered and further S&P gains came in next three months and longer (like 2004, 1983, 1972). But many sell- offs on late cycle hikes became corrections or even bear markets."

Unfortunately, it's only in hindsight do we know where we are in the cycle.

"Determining whether it’s early or late in the cycle is subjective, but the shape of the curve, inflation measures, years since the last recession can help," Bianco said. "Next year is likely another mid-cycle year and we don’t expect a severe S&P reaction to hikes, but the risk is the Fed hikes too late or too little and inflation accelerates requiring the Fed to hike to levels higher than expected."

Bianco's 27-page research note is riddled with exhibits. But we thought this one was pretty elegant.

It's the average price move of the S&P 500 during the 4 months before and the 6 months after the 1st rate hike. It's the average of the last 7 hikes.

It's not the most helpful chart for people who enjoy obsessing over the details. It does, however, show that the general direction of the stock market tends to be up.


Read more: http://www.businessinsider.com/how-stocks-move-around-first-fed-rate-hikes-2014-9#ixzz3EMoczX9P

The Top 10 Retirement Challenges: #3. Balancing Risk & Return

Developing a proper asset allocation in a portfolio requires balancing many factors including risk tolerance, cash flow needs, time horizon and return requirements.

Planners want to reduce risk as much as possible in the portfolio while still achieving a sufficient return to achieve the client's financial goals -- an even more challenging task in light of current low interest rates on cash and bonds.

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Seniors and Savers Victims of Plunging Safe Money Rates...

According to the Labor Department, there are 24.6 million households headed by people aged 65+ and older.

Most of these folks spent their lives working, raising families, and saving a little from their paychecks. They are risk adverse and dependent on the income from Certificates of Deposits and money market funds.

As of January, the average interest rate paid on these relatively safe vehicles was 0.24%, the lowest on record dating back to 1959.

Americans have $3 trillion in money market funds and $5 trillion in savings accounts. Compared to 2007, the loss of interest income amounts to $350 billion a year, according to Crane Data.

One-year CD rates have plunged during the last 3 years from 3.63% to 0.53%, and Bankrate.com estimates this translates into a loss of $41 billion a year for savers.

Source: Anchor Capital

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Why Interest Rates Are Jumping...

The chart below shows us that the yield on the 10-year T-Note has gone from a low of 2.38% on October 8th to 3.45% as of Tuesday’s close. That's a yield spike of over +44%!

The primary reasons for the jump are as follows:


1. Economic reports, including consumer spending and retail sales have exceeded expectations.

2. Economic growth is projected to improve in 2011 thanks to persistent quantitative easing by the Fed and the almost certain extension of 2010's tax rates for the next two years.

3. As a consequence of 1. and 2. above, the risk of a double-dip recession is abating, a primary reason why rates have stayed so low for so long.

4. The less the likelihood of a double-dip recession, the less the risk of a deflationary malaise and the greater the likelihood of inflationary pressures.

5. And the less the likelihood of a double-dip, the greater the likelihood stocks will outperform bonds in 2011. As a result, hedge fund managers and savvy investors are selling bonds to buy stocks. And the stampede for the exits before year end is adding further fuel to the momentum. Thirty-year T-Bond yields are also on the rise...

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New Record for 30-Year Mortgage Rate

Here we go again setting new mortgage-rate records!

Freddie Mac's weekly report said the 30-year fixed rate slipped to 4.44% for the week ended Thursday, the lowest since it began tracking the rate in 1971. Last week's rates stood at 4.49%, and a year ago it was at 5.29%. 

The 15-year fixed rate fell to 3.92% this week, the lowest since Freddie Mac began tracking it 1991, down from 3.95% last week and from 4.68% a year ago. 

Adjustable-rate mortgages also declined, with the 5-year rate falling to 3.56% this week, the lowest since 2005 when the lender began tracking it. 

Mortgage tracker Bankrate.com, which surveys large lenders across the country, said the average 30-year fixed loan sank to a record low for the fourth consecutive week, falling to 4.57% from 4.66% the previous week. 

The 15-year fixed rate, which is a popular option for refinancing, also fell to the lowest level in the history of Bankrate's 25-year old survey, dipping to 4.06%, from 4.11% the week before.

 While the 1-year adjustable-rate mortgage held steady at 4.8% for a fourth week, the 5-year adjustable-rate mortgage dropped to a record low of 3.92% from 3.95% the previous week.