by Douglas Drabik, Fixed Income, Raymond James
The bond market has settled in. The week provided minuscule changes to interest rates, yet the tone of things to come has done anything but settle in. So many questions, so many opinions and so many different answers. Perhaps the market is stalling, attempting to figure out what the future fiscal policies will mean. Perhaps the markets have settled down because of the continuation of modest growth, unhurried inflation and satisfactory employment levels. Since experts and investors alike seem to bungle predictions with scary consistency, maybe itâs time to just think about some of the factors that could affect interest rates going forward.
The Fixed Income Quarterly is set to be released this week. It will focus on âWhat Ifsâ instead of making pointless predictions of the future. Over the last 9 years or so, we have been in a highly regulated, global central bank controlled environment. The new administration is promising significant deviations from these policies. The new programs, the ability to pass changes, the time frame to implement transformations, the acceptance/delivery and the global reactions are all unknowns. This isnât a time to panic or predict but a time to pay close attention to what transforms and stay diligent to appropriate asset class allocation in protecting oneâs wealth.
Equity markets may continue to surge. Changing tax rules may instantly and favorably change price/earnings ratios without companies even making any adjustments. If equity portfolios continue to rise in value, it will be important to continue to maintain an appropriate asset class blend. If making money is half the battle, maintaining it is the desired culmination.
Interest rate disparity among global economic powers appears unremitting. Will this remain a headwind to higher domestic interest rates? Inflation has inched up but still shy of the desired Fed level. There are all sorts of dividing rationales as to whether it will take off or continue in what has been a fairly tight range for 30 years (see the upcoming FIQ for greater detail).
The central banks around the globe have ballooned their balance sheets, increasing money supply. At the same time, member bank excess reserves have increased, averting drastic change to actual money circulation. Will the central banks unwind the balance sheets and/or member banks begin to loan out excess reserves to businesses and individuals? Any of these events can potentially impact interest rates.
The point is that this hardly seems like a time to make predictions. Instead, it is time to observe actual changes as they unfold and react with conscientious detail to protecting your wealth via appropriate asset allocation.
Copyright © Raymond James
