| Sarasota Herald-Tribune
Bill Dudley is a senior research scholar at Princeton University’s Center for Economic Policy Studies and former president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee who wrote recently in a Bloomberg article that no central bank wants to admit that it’s out of firepower.
However, as Dudley wrote, the Federal Reserve is very near that point. This means America’s future prosperity depends more than ever on the government’s spending plans — something the president and Congress must recognize.
Yes, there is always something more that the Fed can do. It can push down longer-term interest rates by buying more Treasury and mortgage-backed securities, or by committing to keep buying for a longer period.
It can promise to keep short-term interest rates lower for longer, or until inflation and the unemployment rate reach their targets. It can put a specified ceiling on long-term interest rates (a maneuver that economists call yield-curve control). It can even take interest rates negative (a move that Fed officials have so far rejected).
Here is the crucial point. Even if the Fed did more — much more — it would not provide much additional support to the economy.
Interest rates are already about as low as they can go, and financial conditions are extremely accommodative. Stock prices are high, investors are demanding very little added yield to take on credit risk, and a weak dollar is supporting our exports.
The rate on a 30-year mortgage stands at about 3%. If the Fed managed to push that down by another 0.5 percentage point, what difference would it make? Hardly any. The housing market is already doing very well.
Therefore, it is easy to overestimate how much change is possible in the first year of any presidential term, especially for things that can hit you squarely in the wallet, like taxes, retirement rules or health care.
If you are focused on the short-term direction of the stock market and the money you may have been fortunate enough to make, take a moment to step back and remember why you invested in the first place.
Stocks can lose a lot of value in a short period. However, over decades, they tend to deliver enough growth to allow you to achieve long-term goals, like being able to retire and live off the money.
That, however, happens only if you have the courage, discipline, and leftover income to save regularly and do not sell each time you think something scary is going to happen.
Here is something else to keep in mind. Take all the physical assets owned by all the companies in the S&P 500 index, all the cars and office buildings and factories and merchandise, then sell them all at cost in one giant sale.
The result would be an amount that does not even come out to 20% of the index’s $28 trillion value. Much of what is left comes from things you cannot see, touch, or feel, i.e., intangibles.
This is, in the broadest sense, a new phenomenon. Back in 1985, for instance, before Silicon Valley came to dominate the ranks of America’s biggest companies, tangible assets tended to be closer to half the market’s value.
The shift picked up after the financial crisis of 2008 and is taking off anew during the COVID-19 lockdown, with the value of intangible-heavy companies like Google and Facebook soaring while smokestack stocks languish. All of which is a source of deep concern for those who worry about things like employment and inequality.
In that regard, there was an interesting note on Bloomberg from JPMorgan Asset Management that it is cutting its projections for cross-asset returns over the next decade and signaling more pain for the so called standard 60/40 portfolio that has long formed the bedrock of traditional portfolios.
The approach allocates a majority, 60%, to equities tied to economic growth, while the remainder is put into bonds which act as a ballast and cushion downturns. Such a balanced approach will earn 4.2%, down from 5.4%, in coming years, according to the $2.3 trillion fund manager.
JP Morgan reduced its forecast for global equities by 1.4 percentage point to 5.1% in the next decade, citing elevated valuations in large domestic companies. It forecast negative inflation-adjusted returns across almost all sovereign bonds over the next 10 to 15 years, with yields remaining low even after rates normalize.
Some analysts are advising yield-seeking clients to focus more on companies with stable balance sheets and a trend of dividend increases, rather than the greatest dividend yields.
Bank stocks, for instance, have historically offered investors relatively good yields. But the Federal Reserve has warned that banks could face as much as $700 billion in loan losses if the economic recovery takes longer than expected, making the group a potentially risky play.
To that end you might want to consider dividend-paying stocks that have come out the other side of COVID-19 with strong balance sheets and cash flow.
You can write to Lauren Rudd at Lauren.Rudd@RuddInternational.com or call him at 941-706-3449. For back columns go to RuddInternational.com.