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Growing Pains

Growing Pains

June 24, 2013 by Lesjak Planning

Our last e-mail just a little over a month ago commented on the fairly quick rise to new highs in the stock market. It is looking like our Federal Reserve Chairman, Ben Bernanke, began to feel like the rise to new highs was a little too quick. We have heard that the timing of last week’s Fed meeting comments suggesting that he may soon taper off the buying of bonds, which has kept interest rates low, was meant to bring market levels down a bit. Obviously with China’s economy slowing and ours just barely chugging along, there is zero chance that the Fed will actually stop pouring money into our economy any time soon.

Those savers that were forced to move to stocks and bonds due to the non-existent savings returns scare very quickly. Especially when the threat of rising interest rates cause the Treasury bills to have their worst one day decline in over a decade as happened last week. We have written numerous times in these columns that bonds are very vulnerable to setbacks when the trend in interest rates turns up.

As of this writing, the S & P 500 Index is down 6.1% from its high last month. From a technical analyst’s viewpoint, the intermediate trend of the market is still up and the recent sell off is still mild in comparison to the three previous corrections since October 2011. Most of their indicators show an oversold position, meaning that the prices have come down too far in relation to market valuations. Even though an oversold position is determined, markets can continue to decline farther and become even more oversold. These are the times when emotional decisions can over run normal cycles when investors think they are in “safe” investments and they realize that they misunderstood the risk.

Chairman Bernanke may very well be testing the waters and preparing investors to begin planning for the inevitable end of it’s easy money policy. Once the markets adjust to this change of policy, investors will realize that equity markets actually do quite well in a growing economy with normal interest rates. The next few days should make it clearer whether this is the short 5-7% correction we were expecting, or a longer correction to get us to more oversold levels and re-charge the energy for the next up leg.

It is important to remember that when you own equities, you own individual companies. At this point, those companies are managing quite well and their share price is now cheaper than just a week or two ago.

Enjoy the 4th Holiday!

There is no doubt that the easy money policy (printing money) that the Federal Reserve has committed to has helped the stock market.

The perceived stability of our government bonds and the slow but steady growth in our economy has drawn large amounts of foreign capital to be invested in our markets. Though not robust, our economy still is one of the world’s strongest which is not overlooked by foreign investors. This foreign capital played a large part of the markets rise to new highs. Quite possibly the fuel for the next up leg in our equity markets will come from bond investors who now realize how quickly values decline when interest rates inevitably rise.

The Fed finds itself in a tough spot. It cannot just stop printing money and let interest rates rise. Mortgage rates and all borrowing costs will increase and will provide a hit to an already sluggish economy. It also cannot continue to artificially keep interest rates low forever and circumvent natural market cycles.

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Lesjak Planning

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