Who's policies sent the country into recession in the early 80's? That and more in today's PEEK fo the WEEK from Hagen Financial
December 21, 2015
The Markets
After a level of hype that would have exhausted even
the most dedicated Star Wars fans, the Federal Reserve finally began to tighten
monetary policy last week, raising the funds rate from 0.25 percent to 0.50
percent.
Although financial markets appeared sanguine when the
rate hike was announced, the calm dissipated quickly. The Standard & Poor’s
500, Dow Jones Industrial, and NASDAQ indices finished the week lower.
International markets fared better. Most finished the week higher.
The last five times the Fed has begun to raise rates,
the U.S. dollar has remained stable and stock prices have risen, on average, in
the months immediately following the hike, according to The Economist.
While tightening monetary policy (and talk of
tightening monetary policy) often affects financial markets immediately,
economic change happens at a more measured pace. The Economist explained:
“The impact of changes in interest rates is not
usually felt on announcement…The response of the real economy also comes with a
delay. Most reckon it takes time for monetary policy to shift spending habits,
and one rate rise is more an easing of the accelerator than a U-turn.
Unemployment continued to fall in each of the past five tightening episodes.
That will probably happen again...The most uncertain variable is inflation.
This fell rapidly following rate rises in 1983 and 1988 as the Fed established
its hawkish credentials. Yet in 2016, the most likely direction for inflation
is up (the rate rise is aimed at restraining its ascent).”
Another factor affecting the U.S. and global economies
is the price of oil. Last week, The Wall
Street Journal reported oil prices declined to a new six-year low. Falling
oil prices have contributed to deflationary pressures in Europe, stunting the
region’s economic recovery. They have had a mixed affect on the U.S. economy,
helping consumers and hurting the energy industry.
Data as of 12/18/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard &
Poor's 500 (Domestic Stocks)
|
-0.3%
|
-2.6%
|
-2.7%
|
11.5%
|
10.0%
|
4.8%
|
Dow Jones Global
ex-U.S.
|
0.4
|
-8.0
|
-7.6
|
-0.4
|
-0.8
|
0.5
|
10-year Treasury
Note (Yield Only)
|
2.2
|
NA
|
2.2
|
1.8
|
3.4
|
4.4
|
Gold (per ounce)
|
-0.9
|
-11.4
|
-11.4
|
-14.4
|
-5.1
|
7.6
|
Bloomberg Commodity Index
|
-1.2
|
-25.8
|
-28.6
|
-18.0
|
-13.2
|
-7.8
|
DJ Equity All REIT Total Return Index
|
1.6
|
0.6
|
0.8
|
10.3
|
11.9
|
7.2
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg
Commodity Index returns exclude reinvested dividends (gold does not pay a
dividend) and the three-, five-, and 10-year returns are annualized; the DJ
Equity All REIT Total Return Index does include reinvested dividends and the
three-, five-, and 10-year returns are annualized; and the 10-year Treasury
Note is simply the yield at the close of the day on each of the historical time
periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com,
London Bullion Market Association.
Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not
applicable.
Second guessing the fed is an age old American pasttime. Americans have been speculating about the Federal Reserve’s
monetary policy choices – rate hikes, rate declines, quantitative easing, etc.
– for a long time. It’s clear when you take a look at a few modern Fed Chairs
and the Fed’s activities under their leadership.
Paul Volcker (1979-1987) took over an economic quagmire known as
The Great Inflation. In the early 1980s, U.S. inflation was 14 percent and unemployment
reached 9.7 percent. Volcker unexpectedly raised the Fed funds rate by 4
percent in a single month, following a secret and unscheduled Federal Open Market
Committee meeting. His policies initially sent the country into recession. The
St. Louis Fed reported "Wanted" posters targeted Volcker for
"killing" so many small businesses. By the mid-1980s, employment and
inflation reached targeted levels.
Alan Greenspan (1987-2006) was in charge through two U.S.
recessions, the Asian financial crisis, and the September 11 terrorist attacks.
Regardless, he oversaw the country’s longest peacetime expansion. In the late
1990s, when financial markets were bubbly, critics suggested, “…Mr. Greenspan’s
monetary policies spawned an era of booms and busts, culminating in the 2008
financial crisis.”
Ben Bernanke (2006-2014) took the helm of the Fed just before the
financial crisis and Great Recession. When economic growth collapsed in 2007,
the Fed lowered rates and adopted unconventional monetary policy (quantitative
easing) in an effort to stimulate economic growth. In 2012, economist Paul
Krugman called Bernanke out in The New
York Times, “…the fact is that the Fed isn’t doing the job many economists
expected it to do, and a result is mass suffering for American workers.”
Janet Yellen (2014-present) is the current Chairwoman of the Fed. Under
Yellen’s leadership, after providing abundant guidance, the Fed raised rates
for the first time in seven years. The International
Business Times reported several prominent economists think the increase was
premature, in part, because there are few signs of inflation in the U.S.
economy.
In many cases, it’s difficult
to gauge the achievements and/or failures of a leader – Fed Chairperson,
President, Congressman, or Congresswoman – until the economic or political dust
settles. Sometimes, that’s long after they’ve left office.
Weekly Focus –
Think About It
“We are too
prone to judge ourselves by our ideals and other people by their acts. All of
us are entitled to be judged by both.”
--Dwight
Morrow, former U.S. Ambassador to Mexico
Best
regards,
Leif M. Hagen
Leif M. Hagen, CLU, ChFC
LP Financial Advisor
Securities
offered through LPL Financial Inc.,
Member
FINRA/SIPC.
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock
market in general. You cannot invest directly in this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees,
expenses, or sales charges.
Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.
Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.
The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
http://www.barrons.com/mdc/public/page/9_3063-economicCalendar.html?mod=BOL_Nav_MAR_hpp (Click on U.S. & Intl Recaps, then on "The
long wait (finally) has ended!,” and then scroll down to the Global Stock
Market Recap chart) (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/12-21-15_Barrons-Global_Stock_Market_Recap-Footnote_2.pdf)
http://www.economist.com/news/21684225-economys-reaction-feds-rate-rise-hard-predict-federal (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/12-21-15_TheEconomist-The_Federal_Reserve_has_at_Last_Raised_Interest_Rates-Footnote_3.pdf)
http://www.wsj.com/articles/crude-rises-modestly-as-u-s-stockpiles-fall-1449743438 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/12-21-15_WSJ-Oil_Prices_Tick_Down_as_Supplies_Grow-Footnote_4.pdf)