Or: the dog ate my homework, again…
Taper alert! The dread beast was spotted again today, unleashed by the new Fed Chair Janet Yellen. Another $10 billion reduction in the monthly money printing, now down to a mere $55 billion per month. The blah blah blah was all the usual, all as expected, but the funny part is the persistent attempt at cautious optimism in the face of bad data, which is mostly being blamed on the weather these days. Even in California?
Bottom line, Wall Street growth projections being revised back down to the same lackluster 2% or so, no improvement in jobs. The Fed even stated it was not going to tie changes in short rates to getting below 6.5% in the “official” and widely published unemployment rate; meanwhile the broader measure stays in the teens and millions remain on the sidelines without any job or with part-time work or lesser employment. Still stuck, sadly.
And now for the bad news, the crisis in Eastern Europe
Crimea is gone, taken over by Russia. The question is, in the face of little serious resistance, will Russia stop there or attack Ukraine? President Obama said tonight that the United States would not engage in any military “excursion” into Ukraine, so it is up to Mr. Putin now. Disturbing to contemplate what might follow that invasion.
We are not suggesting that there is any predictable market result to contemplate. Markets are about profits, and however anyone might feel about these military actions and potential bloodshed, it is not clear that there will be any substantial long-term effect on equity markets. Bond markets might actually benefit. We felt it was important to mention these events, as they are historic and alarming, but they may or may not affect the markets. As we have already observed, the lack of response from the United States and NATO makes armed conflict between the major powers less likely, and markets have enjoyed a “relief rally.” The point is not to panic and make a financial mistake in reaction to these events. That will not help anything.
Meanwhile, looking at tax-exempt fixed income…
The article linked below is written by a muni bond manager that we know well. Throughout this multi-year period of fears about rising interest rates, they have been counseling clients to be sanguine about bonds. With the Fed keeping short rates at zero and actively working to keep long rates down (with the now $55 billion of printed money each month buying at the longer end of the curve, see above), collecting a few percent of tax exempt interest and enduring some pretty modest fluctuations in principal value makes good sense. No reason to panic, especially when there are no signs of inflation either. We have what is known as a steep yield curve, meaning long rates are a lot higher than short rates. So while we have all been waiting for that big spike in interest rates, we have been collecting a lot of tax exempt interest.
Standish Mellon has written a nice, short note on the topic, well worth five minutes of your attention: Monthly Municipal Market Update - March 2014
And remember what the bonds are for–when equities do go down, as they certainly will at some point (and as they did in January), you will be glad you have some bonds for stability. It is always nice to be diversified.