The International Management Consultants Association recently hosted an annual conference that included two speakers addressing the Federal Reserve Bank (the Fed): Jeffrey Gundlach, one of the top fixed-income managers in the country (according to Morningstar) and Sam Stovall, chief equity strategist at S&P Capital IQ. Here are a few of their insights:
When will the Fed raise interest rates? Probably not until we are out of the debt morass.
“The Fed can no longer do what it once could, which is to take preemptive strikes against inflation,” Gundlach said.
“They will stay low for as long as we are in this debt morass. One fundamental rule I have for investing is that bull markets create wealth through cooperation. Bear markets are characterized by a lack of cooperation and wealth destruction. We don’t see much cooperation presently.”
Added Stovall: “In the United States, we have better than expected economic growth. China is due for a soft [rather than hard] landing and Europe is involved in a long-term refinancing operation that is seen as reducing the threat of a Lehman-style meltdown repeat.” Stovall tempered his optimism somewhat by noting potential headwinds that concern him, including rising gasoline prices, geopolitical tensions, the potential for higher interest rates and changes in tax laws.
The economy has greatly relied on the Fed since the financial crisis began in 2007. Treasury yields are now below zero on an inflation-adjusted basis for only the second time since the Eisenhower administration. The Fed stimulus that has led the fixed income markets cannot last forever. None other than Warren Buffett, chairman of Berkshire Hathaway Inc., recently said that low interest rates and inflation have made bonds “among the most dangerous of assets.”
It is more important than ever to keep up with the markets by communicating with your investment advisor and investment banker.