Low Interest Rates and Reduced GDP Estimates
With interest rates staying so low throughout the world, the attraction of riskier assets such as stocks remains high. An example of this attraction to risk is in the European markets where junk bond yields are lower than current inflation rates of 3%. There is no end to bond purchases by central banks in Europe so interest rates remain bearing mostly negative yield, including the 10 year benchmark German Bund with a -.32% yield. The logic behind reaching for low credit securities like junk bonds is that with the current central bank stimulus programs, it is likely that default rates will remain low.
Another interesting fact over the past year is that actively managed mutual funds have outperformed passive index funds. This happens periodically but this seems to be a result of active managers overweighting pandemic stocks resulting in an overweight in the sector vs. passive funds which reflect index weightings. But don’t assume this will continue because it has not historically lasted consistently. Of course, passive indexes have great returns so far this year as well.
Here is the good news/bad news strategy again. GDP growth estimates are coming down with the surge in the Delta variant. New job figures were disappointing and there are indications the economic rebound is hesitating mostly attributed to Delta but also to supply chain constraints. Demand for space on commercial freighters from Asia is at a premium. Shipping costs have skyrocketed. Another factor related to reduced GDP growth estimate reductions is consumer spending concerns based on the end of increased unemployment benefits this week. So far, this week, markets are reflecting this nervousness. However, these concerns will encourage the Federal Reserve to delay talk and action related to curtailing or ending their bond buying and encourage rates to stay lower longer. This is bullish for equity markets. There are not a lot of choices to invest for income other than equity markets for a competitive return. We have been here before.
We are paying attention to legislation proposed in Congress that impacts personal financial planning in many ways. Areas of importance are Required Minimum Distributions (RMDs which were recently pushed back to age 72 from the previous age of 70. RMDs apply ONLY to pre tax 401(k) and pre tax IRA accounts), marginal tax rates, capital gains taxes, and estate planning in many regards. Right now nothing has passed, so no need to concern ourselves, but we are watching.
I am terrible at telling jokes. In fact, you can tell me the same joke periodically and I will laugh each time not really remembering the punchline. Clearly to me, this doesn’t run in my family as my brother tells a really good joke. Thankfully, being able to laugh at jokes is almost as important as telling jokes as this column from The Atlantic by Arthur Brooks discusses. He analyzes the following joke: “When I die, I want to go peacefully in my sleep, like my grandfather. Not screaming in terror, like the passengers on his bus.” Read his column on how important humor is in relation to happiness.
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