In September of 2012, the central bank of the United States (a.k.a. “the Fed”) announced its largest debt-buying policy ever. The $85-billion-per-month endeavor sent mortgage rates to amazingly low levels. Real estate purchases soared, property prices rose sharply and homeowners became enamored with “3.4% Fixed for 30 years.”
Naturally, the central bank hoped that its manipulation of interest rates would inspire conspicuous spending. Yet that’s not all that the Fed managed to electrify. Ultra-low rates also encouraged titanic risk taking in the U.S. stock market. Since September 2012, U.S. stocks have increased in nine out of the last eleven months. Similarly, the U.S. stock market has not experienced a pullback of 10% since the Fed publicized similar bond-buying promises in September of 2011. That’s 23 months and counting.
In the shorter-term, Federal Reserve stimulus via quantitative easing (QE) has helped to enrich many people’s finances. With the uptrend continuing, I’ve made certain to keep my clients allocated to a wide variety of U.S. stock ETFs including, Vanguard Dividend Growth (VIG), iShares Russell 1000 (IWB), PowerShares Pharmaceuticals (PJP), iShares S&P Small Cap 600 Value (IJS) and UBS E-TRACS Alerian MLP (MLPI). Our stop-loss and trend-following methodology will determine when to lighten up on core holdings.
In the longer-term, however, an addiction to extremely low rates is going to very difficult to break. In fact, I am not convinced that Americans will ever be able to do it. We may wind down QE 3… only to see our Fed announce QE4 in late 2014.
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