It has been widely suggested that investors around the globe have too much faith in the Federal Reserve and other central banks. I am not entirely sure the statement is as true going forward as it is looking backward. For instance, Greenspan’s Fed raised overnight lending rates from roughly 3% in 1993 to 6.5% in 2000, when the dot-com bubble subsequently crashed. Greenspan/Bernanke hiked overnight lending rates from a spectacular low in late 2003 of 1% up to 5.25% by July 2007. Shortly thereafter, the financial system and stock markets around the globe plummeted. In both instance, Federal Reserve decisions to slow the economy and/or normalize interest rates involved a series of significantly large rate hikes. 5.25%? 6.5%? And yet, here investors are… fretting about the possibility of leaving 0% for six-plus years for the rockier shores of 0.25%?
My point is simple: In the same way that the Bank of Japan has been unable to get their overnight lending rates above 0.5% at anytime in the last 15 years, the U.S. will not be able to “normalize” near 3.5%, or 4.5% or 5.5%. It simply cannot occur. Households require low rates to service the interest payments on their debts. Governments at every level – local, state, federal – require low rates to service their obligations. It follows that any economic downturn, no matter how minor, will see additional flattening of the yield curve and a return to the safest of the safety plays, U.S. Treasuries.
If you missed the bond bonanza of 2014, look to see if funds like iShares 10-20 Treasury (TLH) can stabilize near its 100-day intermediate-term trendline. If so, you might have a buy-the-dip opportunity that should simultaneously hedge against a stock slide. You will want to wait for the selling pressure to subside, though.
As for stock assets in 2015, I have primarily concentrated on a slow increase in exposure to currency-hedged foreign markets. One of my favorites for the last 6 months has been iShares Currency Hedged Germany (HEWG). Granted, I have WisdomTree Hedged Europe (HEDJ) in many client portfolios as well. However, Germany exporting on a depreciated euro? No country in the euro-zone can do that more effectively. Moreover, the HEWG:HEDJ price ratio has been favoring HEWG.
