Words are Worth 380 Billion Dollars: The Era of Policy Errors Begins
On Wednesday, the Chairman of the Federal Reserve gave a very slight indication the Fed would consider adjusting the amount of bonds they buy on a monthly basis from $85 billion.(source: Bespoke, 5/24/13) In that moment, the US Equity markets tanked. We lost approximately $380 billion dollars in stock market valuation or 2.5% of GDP. (www.tradingandeconomics.com: United States GDP 5/28/13)
Global markets also reacted negatively.
International Market Reactions
(The Telegraph 5/24/13)
While we can all prognosticate how and when the Fed will begin to cut back on their purchases of bonds (which are driving down fixed income yields and forcing investors into stocks); it should now be obvious investors don't trust the economy to function at any meaningful level without policy intervention.
The question prior to Wednesday was how much policy reliance were investors counting on versus a properly functioning economy and capital markets? Answer: Quite a bit.
Volatility jumped to its highs in the last 30 days as measured by the VIX.
www.marketwatch.com: VIX Index Chart 5/28/13
While Bernanke said nothing he has not said in the past and his formal comments reiterated the Fed stance to maintain the buying of bonds for a prolonged period of time, there are some very nervous investors.
It does no good to speculate on investor jitters and concerns over a pull back. Much of this thinking I put in the "market timing" category. What is productive, is for you to again evaluate the time horizon as to when you begin needing your capital.
If it's less than 5 years, start having a serious conversation with your advisor. I use 5 years as a market cycle and you should be willing to withstand almost any volatility if you have time.
If it's more than 5 years, take a hard look at your fixed income allocations. Duration and where your fixed income falls on the yield curve will start to matter a whole lot.
We can now officially kick off the “Era of Policy Errors.” It won't come on all at once but the "new normal" will require a deft hand with politicians and the Federal Reserve. That's why I expect this period to be very volatile, nerve wracking and in the short run maddening. Whether you are a pension account, a foundation or endowment, family or individual, it's critical to reassess your time horizon. The only free lunch I can ever give you is the ability to shape risk with time when it comes to broad based public market equities.
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Tim Phillips, CEO - Phillips & Company