The first is a piece from MarketWatch by Quentin Fortrell titled, “10 Things Economists Won’t Tell You.” If you have been investing for a while, you might have noticed what they do tell you is not that helpful. The second was penned by a regular in this blog, Jeff Sommer of the New York Times. It is nice to give kudos instead of brickbats, because Sommer’s piece really does get at an important question. “How much do I need at retirement?” The article is titled “For Retirees, A Million-Dollar Illusion.” It is a must-read for young people just starting out, people with years left to retirement and employers offering 401k plans (where the participant aren’t participating or they they are not placing risk assets in their portfolios). It is a strong plea to save and invest now, because a million dollars isn’t what it use to be.
And now on to the next part of our session:
Life After (and before) QE.
The market and punditry’s recent obsession is focused on how the market and economy will react to the eventual removal and reversal of Quantitative Easing. To give a little perspective, I put a few figures together that I thought you might find of interest.
The Dow Jones Industrial Average closed 1962 at 652.10 (link to 50 year history). In 1963 the ten-year U.S. Treasury averaged a yield of about double Friday’s close of 2.18%. That yield moved higher for most of the next two decades with the peak average in 1981 at 13.2%. In 1993 the ten-year averaged 5.83%. Only after 9/11 did it drop back to the 4% level, the 1963 average. The Dow closed May 18, 2001 at 11,301 up 10,649 points from our 1963 start point. In 2007 the ten-year averaged 4.63% and the Dow had a high close, September 10, 2007 of 14164.53. BTW thirty year mortgages averaged 6.34% (w. .07% pts.) in 2007. Right now a 30-year mortgage is priced around 3.91%. Interestingly, that 6.34% rate (over 50% higher than today’s rate) was sufficiently low to keep the heat turned up under the housing bubble.
Bottom line, markets can do well in a rising rate environment. Yes, there may be some pain getting there; but with much higher rates in place in the 1980s vs. the ’60s, we managed almost quadrupling the Dow by 1987. I might also point out, if you don’t need to borrow money, you are in pretty good shape. Most corporations have taken the opportunity that lower rates have provided to shore up their balance sheets, secure very cheap long-term funding and reduce interest costs. For those who haven’t, the window is still open.
What do you think?
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