On Monday of next week we hopefully successfully do a major upgrade to our internal email systems. This will mean each of our company emails will be down, but not all at the same time. As the switch occurs, while promised nothing will fall through the cracks by our IT team, if you happen to send an email and you have not heard from us, please re-send it just to be safe.
Rates
Ok, it’s a Friday so we will be brief, Janet Yellen, head of the Federal Open Market Committee (FOMC) notched another rate increase under her belt without disrupting the capital markets. Once thought impossible, so far, slow and steady (tortoise- not the hare) is winning the interest rate normalization race.
This is a good chart of the ever increasing rates… finally !
Ahhhh…. Today is a Friday… enjoy your day and your weekend !
It is very interesting to watch the once ferocious markets hate a possible interest rate increase, only now to greet it like family.
Interest Rate Increase Today
It is highly likely the FOMC (Federal Open Market Committee) led by Janet Yellen will raise short term interest rates up to the 1% threshold at their announcement later today. What is more interesting is just a few quarters ago even a whiff of a raise threw the capital markets into a tailspin.
Past rate increase events:
The US Dollar soared as other countries across the world continued to push their rates down.
US Capital Markets threw a temper tantrum in dispute of a raise.
Headlines beamed with fear of the crazy FOMC raising rates.
Probably our favorite chart from our friends at JPMorgan- higher rates can be a good thing
There will be a day that it does matter. Rates can go too far which results in an inverted yield curve (short term rates are higher than long). For now it seems everyone is on the same page and digestion of higher rates is occurring.
Have a Great “Higher Short Term Interest Rate” Day!
From Bloomberg Consumer Sentiment to Gallup Polls to the Conference Board and to our University Of Michigan Survey of Consumers (Multiple Polls reviewed in detail in our most recent Newsletter-coming to you soon) all are pointing higher, with some even pointing to all time highs.
A more pro-growth tone seems to have put wind in the sails of those polled as well as capital market participants. Heck, the most recent quarter even garnered an interest rate increase of a small .25% in the shorter term Federal Funds rate. Looking back just over a quarter and including December of 2016, there are now two interest rate increases under the FOMC’s (Federal Open Market Committee’s) belt. The first rate increase in this economic cycle, post 07-09 Great Recession started in December of 2015. According to many, created the “record breaking” rocky start a year ago. Fast forwarding to today, market participants and the economy for that matter, seem to welcome a normalization of short term rate increases.
Speaking of rate increases, under normal circumstances all other items being held equal, which then never are, interest rate increases are a muzzle on the economy and in many cases are the cause of a larger slowdown or recession. The problem with this comparison is rarely have short term rates been zero, which they were held at for over five years in this economic cycle. It is possible that an increase of rates from such a low level to a more normal level may actually be energizing rather than resistance as past comparisons may show.
Is there a downside?
Capital markets look forward, usually 6-12 months. All this positive sentiment has led to stretched valuations from a historical point. The current Price/Earnings ratio, again shown in our latest newsletter, finds itself at 26, with a long term average of 15. Just as economic cycles do not die of old age, capital markets do not go down just because their valuations may be stretched. Higher valuations can lead to less room for errors, not a time to let our guards down and also not a time to be swinging for the fences, however valuations can return to normal simply with all this positive sentiment translating into higher world capital market earnings. Said another way, “Growing into the current Valuation.” Time will tell, and we will be watching closely.
Shhh…. at the penning of this post the gang is still sleeping (promised full attention this week) …. Couldn’t keep away from this mid-spring break update…
Rate Increase Today
Janet Yellen and the FOMC (Federal Open Market Committee) have signaled two rate increases this year. The capital markets have fully priced in an increase today. Their increase will move “Short term” rates to .75 % or 75 basis points.
This will help short term bonds, checking accounts and the like.
Recall our friends at JPMorgan think rates have been too low for too long…. if they are correct, this increase may help accelerate the economy.
We agree!
Only time will tell if this is correct.
One thing is for certain, the capital markets are much more receptive to these increases than they have been in recent past.
Due to speed and security concerns, this will be my last post until next week …. shhh… the family will never know !
Ok, so the reminiscing is still going on. In our Q1 2017 Newsletter, coming to a mailbox near you soon, we take time to reflect on what a zany year it was… from all angles… As a preview, but not to steal the thunder, here are a few of the points !
Slow Start:
Talk about out of the starting gates bad. World capital markets finally tugged the large company US markets down, taking the S&P 500 down 15% and oil to under $30 a barrel in mid-February.
Brexit:
Surely Britain would stay in the European Union, the polls were showing as high as a 90% probability that they would. As the votes were tallied, something strange occurred as the Brits did in fact vote to leave the EU.
US Election:
The polls would once again miss big as the election results rolled in and a surprise candidate was nominated president.
Federal Reserve Raises Rates:
Mid December marked the day the FOMC (Federal Open Market Committee) raised rates from .25% to .50%. Markets yawned, even as the FOMC signaled they expected three more rate increases during 2017. It has been a race to see who moved to the back of the papers faster, Tony Romo or the FOMC!
Shortest Day of the Year
With an outdoor family that spends a lot of time on the Tennis courts…..as well as other outdoor activities, today’s shortest light day of the year comes with as much cheer as the Holidays!
Not surprisingly, Janet Yellen and the gang at the FOMC (Federal Open Market Committee) hit the pause button last week on an interest rate increase.
No Rate Increase
Basically the FOMC is signaling no rate increase before the election. As strong of a conviction (huge review) that we have for a rate increase, we are fine with a delay given the coming election (first debate tonight.)
Capital Markets Pleased
Treasury Yields (rates) Down Bonds Up, Equities Up, Utilities (rate sensitive) Up
We were slightly surprised by the overzealous capital market reactions!
We are at the half way point of the year. In this review of the year so far and preview of the remainder, we look longer than our regular month for sentimental and digital diary reasons!
Here is our June 2016, Extended view – Economic and Capital Market Review, with a great financial planning tip, and of course our Video for your viewing and listening pleasure.
After discovering we DID NOT have a comprehensive high level Estate Planning article, a two-part series was happily created – for the record more articles similar to this are expected due to their popularity and handy reference ability:
ESTATE PLANNING DOCS
Will – Document that directs non-beneficiary directed assets (Ex ..house, property, cash and regular investment assets) and may create trusts for minors, names a Custodian, Executor and may also create trusts and Trustees for estate tax minimization and other uses (see final statement in article below on Trusts.)
Power of Attorney– Financial document that appoints someone other than you to make most financial decisions in your absence. .
Healthcare Power of Attorney – Document that appoints someone to make important healthcare decisions if you are unable.
HIPPA – Allows your appointed person to receive medical information on your behalf.
Living Will- Cease and Decease – DNR – These titles are one in the same and are frequently confusing. This document allows medical professionals to NOT mandate all possible care, should you become deceased mentally, but not in body function.
Estate Planning Docs Part Two – Trusts
TRUSTS – ALL TYPE REVIEW
Revocable Trust – By far the most common and most commonly misunderstood Trust of the bunch. Revocable means it can be changed at the grantors request.
Testamentary Trust – Trust that is usually embedded in a Will and is created upon the grantors death.
Irrevocable Trust – The Hulk of Trusts. Being Irrevocable, once established and funded, this Trust is a beast. Estate tax, liability, inheritance are just a few items that can be addressed with an Irrevocable Trust.
QTIP Trust : Qualified Terminal Interest Trust – Most common set up by Grantor to give direction to assets beyond the spouse.
Credit Shelter/A:B Trust – Type of trust that is used to help minimize Estate taxes by maximizing the first person in a married couples Estate tax exemption upon death commonly resides in a Will.
GST or Generation Skipping Trust – This handy estate planning trust gives relief to Grantors by jumping a generation and essentially skipping the Grantors children and passing to the grandchildren.
ILIT : Irrevocable Life Insurance Trust – This trust is very useful in getting life insurance proceeds out of a Grantors estate.
With the British vote to exit the European Union, the Federal Open Market Committee (FOMC) lead by chair Janet Yellen will be hard pressed to raise rates. The only reason we can see higher rates sooner rather than later now would be some (multiple reports needed) major inflationary factors that feed through to the economic reports- While big advocates of higher rates and our research shows rates have been raised during an election year, it’s likely off the table for the remainder of the year.
Brexit changes US Presidential Election
Brexit may also change the US Presidential election as the polls of the British were so far from accurate, we expect many to have less confidence in our current US Presidential polls.
Capital Markets Update
New all time high?
With the afore-mentioned rate increase off the table and possible international perceived disruption due to Brexit – US capital markets may be the recipient of fresh capital from global corners of the world.
New highs (S&P 500) would not surprise us at this time and the odds are now better than not from our perch. Minor expansion in Bunny like fashion (explanation to come upon occurrence) looks possible, of course twists and turns have been the norm lately.
Earnings are the ultimate driver of equity prices, and US capital markets are currently frothy if not overpriced. We think they can get more overpriced due to the above concerns.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, please consult your financial advisor prior to investing!
Background
The is the vocal portion of J.K. Financial, Inc. a Dallas Texas Based Fee Only Total Wealth Financial Planning Firm. Founded by John Kvale, a Dallas Texas Fee only Financial Planner and Total Wealth Manager.
Technology Upgrade Update – Rates Rise – Friday
On Monday of next week we hopefully successfully do a major upgrade to our internal email systems. This will mean each of our company emails will be down, but not all at the same time. As the switch occurs, while promised nothing will fall through the cracks by our IT team, if you happen to send an email and you have not heard from us, please re-send it just to be safe.
Rates
Ok, it’s a Friday so we will be brief, Janet Yellen, head of the Federal Open Market Committee (FOMC) notched another rate increase under her belt without disrupting the capital markets. Once thought impossible, so far, slow and steady (tortoise- not the hare) is winning the interest rate normalization race.
Ahhhh…. Today is a Friday… enjoy your day and your weekend !
Talk to you next week!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com
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Posted in Interest Rates, Investing/Financial Planning, Market Comments, Political
Tagged FOMC, Interest Rates, Janet Yellen, technology