When interest rates drop...

[blanston]

I anticipate the Fed will stop raising rates soon. Then start lowering. I would like to know what investments, or asset classes, become attractive at the begginning of this period. I have been trying to check history of similar periods, like...1987...1992....1998....2001. Based on my shaky memory, outside of 2001, it seems that the stock market did quite well.

I have not had much luck researching and hope others here may have some wisdom to share?

Blanston

 

[brewer12345]

Which interest rates? Long, short, intermediate, all? Depending on which rates fall more than other, medium or long treasury bonds, financial institutions, and mortgage REITs might be appropriate.

 

[Mwsinron]

Hasnt it been historically interest rates average around 5 percent. The last few years of being so low was not the norm.

 

[TromboneAl]

Click here for a nice animated yield curve -- shows how it's changed over the ages.

 

[Mwsinron]

Click here for a nice animated yield curve -- shows how it's changed over the ages.

Neat thanks for sharing the link.

 

[blanston]

The rate I am talking about is the one the Fed controls. The Federal Funds rate. The question is, when the Fed pauses from the continual raises, what asset class will benefit?

Thanks,

 

[mathjak107]

by the time they pause the gains will already be sucked out of the bond market and stocks will probley already have anticipated the pause and factored it in prior just like they did before may...in a short answer by the time the pause happens the big gains are already gone...you need to be in before in order to get the easy money

 

[brewer12345]

The rate I am talking about is the one the Fed controls. The Federal Funds rate.  The question is, when the Fed pauses from the continual raises, what asset class will benefit? 

Thanks,

The purest way to speculate is via fed funds futures contracts, but it is also probably the best way to blow yourself up.

Other than that, regional/smaller banks tend to do well, mortagage REITs, and bonds, although I probably wouldn't go out more than 5 years on the treasury curve.

 

[maddythebeagle]

by the time they pause the gains will already be sucked out of the bond market and stocks will probley already have anticipated the pause and factored it in prior just like they did before may...in a short answer by the time the pause happens the big gains are already gone...you need to be in before in order to get the easy money

I dont want to hear that...just tell me where to speculate....

Interesting notes Brewer, it looks like some of the regional banks/mort. reits that I follow have already made some moves...and the best time to invest was last year. except for BPOP...what is up with that dog.... I keep sending more money in, though...

 

[brewer12345]

Interesting notes Brewer, it looks like some of the regional banks/mort. reits that I follow have already made some moves...and the best time to invest was last year. except for BPOP...what is up with that dog.... I keep sending more money in, though...

There is plenty of room to profit if rates actually do what you think they will. The best time to buy any of this stuff is to wait for the next bond market panic when soem data point comes out suggesting that inflation is still rampaging. The next CPI release would not be a bad time if it comes out high.

I think BPOP is just getting whacked by fears about the housing market and all the shenanigans that most of the other PR banks have been up to. BPOP will shine in the end, so I am happy to buy on the dips.

 

[Gonzo]

DW has about 40% of her 401K in a Stable Value Fund getting less than 4% annually... would now be a good time to get into a bond fund that matches AGG? We would like to get more than 4% and would like more bonds in her portfolio.

Gonzo

 

[brewer12345]

DW has about 40% of her 401K in a Stable Value Fund getting less than 4% annually... would now be a good time to get into a bond fund that matches AGG? We would like to get more than 4% and would like more bonds in her portfolio.

Gonzo

Depends on what you think rates will do. If you think we are about to see rates start dropping, a Lehman Agg fund is a good idea. If you think rates will rise, stick with the stable value.

 

[Gonzo]

Thanks Brewer...

Gonzo

 

[Brat]

Interesting analysis from St Louis Fed Reserve: Is the US Bankrupt?

http://tinyurl.com/g9kwc

 

[wabmester]

Interesting analysis from St Louis Fed Reserve: Is the US Bankrupt?

http://tinyurl.com/g9kwc

Fun stuff.   FWIW, the paper is written by Scott Burns' co-author of The Coming Generational Storm.

 

[Scrooge]

Interesting analysis from St Louis Fed Reserve: Is the US Bankrupt?

http://tinyurl.com/g9kwc

Kotlikoff argues that "the US government is, indeed, bankrupt", but he then clarifies that it is only bankrupt "insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds." That's a rather unusual definition of bankruptcy, which doesn't appear to serve any useful purpose except to make it sound worse than it is. Which is unfortunate, since his point, i.e. that the current level of discretionary and entitlement spending by the government is not sustainable over the long run given current tax policies and certain assumptions about economic and population growth, is perfectly reasonable and worth pondering.

 

[d]

if we include some projected future payments (which have not been promised or guaranteed) we have a very large debt indeed; which begs the question: what is the dollar value of the country's assets (to include all land, buildings, future receipts) etc.? i.e. we should treat the assets under the same rules we treat the debt.

 

[Mwsinron]

Uncle Sam may need to see one of those debt consolidators....

 

[d]

HELOC ?

 

[Scrooge]

if we include some projected future payments (which have not been promised or guaranteed)

Right, that's why he wrote "implicit" 

Basically, if you assume that:

1. the federal government continues to pay for Medicare (especially Medicare), Social Security and other entitlements based on the formulas currently in place;

2. the country's population will continue to age at the current rate with no major changes like the Baby Boom 50 years ago;

3. federal tax policies, especially in the Social Security/Medicare area, remain effectively unchanged,

then yes, we will have an unsustainable federal budget deficit starting in another decade or two. Benefits may be cut (famous Medicare means testing comes to mind), taxes may be raised, structural changes may be introduced, etc. All of it potentially quite painful and likely to ignite a "generation war".

However, that's a bit of a bait-and-switch. You yell "bankruptcy!" and then you redefine it as something quite different. I think Greenspan described the problem much more honestly a couple of years ago:

Making promises of retirement benefits that cannot be delivered, Greenspan said, was “utterly inappropriate. It is unfair.”

 

[TromboneAl]

Uncle Sam may need to see one of those debt consolidators....

He needs to see a shrink.

HELOC = Home equity line of credit

 

[d]

exactly!

 

[blanston]

Money Magazine has an anwser to my question:


NEW YORK (Money Magazine) -- The Federal Reserve decided Tuesday not to raise interest rates for the first time in more than two years, noting that economic growth had "moderated."

So which sectors are likely to do well now? A recent study from Citigroup looked at the past five runs of Fed rate hikes and examined how stocks performed in the 12 months following each final rate increase.

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One-year gain after Fed stops raising rates
Financials: + 24.7%
Health Care: + 23.4%
Consumer Staples: + 17.6%
S&P 500: + 9.9%



What they found: Classic defensive plays like pharmaceuticals, financials, utilities and consumer staples (which includes companies such as Coca-Cola and Procter & Gamble) have historically gained twice as much as the S&P 500 once the Fed stops raising rates.

 

[mathjak107]

by the time they pause the gains will already be sucked out of the bond market and stocks will probley already have anticipated the pause and factored it in prior just like they did before may...in a short answer by the time the pause happens the big gains are already gone...you need to be in before in order to get the easy money

guess yesterdays action kind of confirms my theory

 

[brewer12345]

What they found: Classic defensive plays like pharmaceuticals, financials, utilities and consumer staples (which includes companies such as Coca-Cola and Procter & Gamble) have historically gained twice as much as the S&P 500 once the Fed stops raising rates.

I think financials are the most attractive for this play. But a word of caution: choose carefully. There has been a lot of loose lending in the last few years and a pause/falling rate environment means that consumers are having some difficulties. Pick financials that do conservative lending, not credit card issuers, subprime mortgage guys, etc.