Daily Commentary

MarketMinder’s View: The headline is overstated, but we think the research here is interesting and illustrates a simple point we often make: While stocks are typically more volatile than bonds over short periods of time, over longer stretches (like 20 or 30 years) they tend to be higher-returning and have less variance from their long-term average return. Hence, if you are investing for the long term, having a high stock allocation is likely better than going heavy on bonds, especially if you need growth to support cash flow. However, that doesn’t mean a 100% stock portfolio is right for every long-term investor—even if their time horizon is long. For example, investors with higher cash flow needs would probably benefit from the lower expected short-term volatility of a blended stock and bond portfolio. Ditto those who are less comfortable with stocks’ higher likelihood of short-term declines—mitigating that with bonds could reduce the likelihood of reacting emotionally and making changes that could affect long-term returns. Yet as the last two years show, it is important to hold proper expectations of a blended portfolio. “Another issue is a lazy belief in the capacity of the two asset classes to balance one another. The researchers found periods in which they moved in unison are more common than people probably realize and that diversifying share holdings across geographies works better.” We would just add that bonds often bounce from bad stretches, too, so we don’t think flipping from a balanced portfolio to all stocks now in search of higher returns is wise. The best strategy is always the one tailored to your long-term goals, cash flow needs, time horizon and comfort with volatility—not one based on what markets just did.

MarketMinder’s View: This piece spends several paragraphs lamenting that the Fed’s quarterly forecasts don’t include projections for the size of its balance sheet or bank reserves—either of which would supposedly amount to forward guidance for quantitative easing and quantitative tightening. It argues these projections would better help investors set expectations and solidify the market’s (and the Fed’s) understanding of how asset purchases and sales affect the economy. Maybe, but the Fed’s projections aren’t actual forward guidance—they aren’t a hint at what officials think is necessary and appropriate policy. Just expectations for where rates and whatnot will be, based on currently available data and opinions thereof. Beyond that, we disagree with the general thrust and cite … everything observed in the article’s second half, which has several zingers about the Fed’s squishy view of what asset purchases and sales accomplish in the real world as well as its long history of flip flops and acting contrary to its guidance. Though we think it overstates things as far as the Fed’s direct causation of “speculative manias and banking crises,” we agree with the general principle that forward guidance has done more to reduce Fed credibility than increase policy predictability and transparency. So we, too, would prefer “that the Fed not say anything about the future at all.” And as far as quantitative easing bond purchases, we think they are best consigned to the dustbin—they flatten the yield curve, which is the opposite of stimulus.

MarketMinder’s View: When the unemployment rate ticked up in October, all anyone could talk about was the so-called Sahm Rule, which is less a rule and more an observation from economist Claudia Sahm that if the 3-month moving average of the unemployment rate rises more than half a percentage point above the 12-month low, the economy is probably in recession. October’s uptick made it close to triggering. But now November’s falling unemployment rate has quieted the talk, as the Sahm Rule’s indicator fell to 0.30 percentage point, which shows how quickly sentiment can shift. The headline rate dropped from 3.9% to 3.7% as employers added 199,000 jobs and the Hollywood actors strike ended, putting Tinsel Town’s brightest (and all the crew members sidelined during the work stoppage) back on the payrolls. Labor force participation ticked up, too, as it usually does when a growing economy pulls more folks back in the workforce. So overall a nice, though backward-looking report. As for the associated Fed chatter, which the final section of the article documents, we simply remind you that Fed moves aren’t forecastable—they will do what they do when they do it.