Both the Stock Markets and Bond Markets of the world have had another negative week, with American stock markets closing at, or slightly below, the lows reached this past June.
Bond markets, which tend to do well when stocks are falling, are however, also seeing a record decline in value, as the Federal Reserve continues with its fight against inflation, by raising short term interest rates to over 3%.
Jay Powell, the chairman of the Federal Reserve, in his most recent commentary, has indicated that it is possible that short term rates could reach over 4.25% by year end, even though that might mean some “pain and suffering” as job losses increase in a softening economy.
So, now is the time to ask, is it time to buy beaten down growth stocks, or should investors, use any rallies to reduce stock and bond holdings over the coming months?
My personal view, although not investment advice, continues to be of great concern about the economic outlook over the coming months. I am particularly concerned about the record growth of both Government and Corporate Debt over the past 10 years, fueled by the Fed’s low interest rate easy money policies, coupled with recent corporate tax cuts producing record Government deficits.
I don’t see any way for the interest on this debt to be repaid, in a slowing global economy.
The world’s growing debt problem is also highlighted by the collapse of the major property developers in China who have left Chinese citizens with hundreds of thousands of unfinished apartment units and investors with essentially worthless securities.
Another sign of a very fragile system, is the fact of the near collapse last week, of the British Bond Market, as several Pension Funds were hit with margin calls, because of their dealings with high risk financial products.
It may have taken a Trillion Dollar intervention in the bond market by the Bank of England (and probably aided by our Federal Reserve) to prevent a complete collapse of that market.
The managers of these Pension Funds were probably talked into these speculative derivatives, by the giant Wall Street firms as a means of getting better returns then were available with plain vanilla bond investments. They probably did not understand the risks involved to these leveraged investments, when interest rates go up.
The Billion Dollar question is will the Federal Reserve be forced to pivot away from their inflation fighting program as the economic slowdown gains traction, and the stock and bond markets continue to weaken?
It took former Fed Chairman Paul Volker, in the 1970’s, raising interest rates to over 10%, to deal with the inflation problem, of that period.
In my imaginary. and hypothetical model portfolio, I would have 80% in 3 month and 6 month Treasury Bills. And 10% each in GLD (a gold ETF) and UCO (an energy ETF) to ride out the storm I see ahead.
But, do your own research with the help of your own professional advisors.
To quote Mark Twain: “September is a particularly dangerous month to invest in stocks, as are July, January, March, August, October, December, April, June, May, November and February.”