By Jill Schlesinger
Tribune Content Agency
As we close out the first quarter of the year, it appears that some have entered the third stage of the psychological condition known as “investor angst” (IA). This malady’s primary symptom causes overarching worry about how every holding in an investment account might react to changes in Federal Reserve policies.
Stage one of IA began nearly two years ago, with the “taper tantrum.” On May 22, 2013, the Federal Reserve announced that it would begin tapering its bond and mortgage backed securities program. The news freaked out investors and they sold just about everything that was considered risky. Eventually, things bounced back and markets regained their footing.
The second stage was “patience panic,” which began earlier this year as investors perseverated over whether or not the Fed would remove the word “patient” from its monetary policy statement. When the news finally emerged that the central bankers were no longer “patient” as to when they would consider hiking rates, reality sank in and investors entered stage three of the affliction: “rate rage.”
The more rational among us might think, “Wait, isn’t it a good thing that the Fed is finally going to normalize its monetary policy? Doesn’t that mean that the economy is officially out of the woods and we can put the financial crisis, the Great Recession and the stinky recovery behind us? And after all, who cares whether the central bank starts increasing interest rates at the June or the September meeting - do 90 days really matter to my long term game plan?”
All of those are great questions, but they matter little to institutional investors (the folks that manage big mutual, pension and hedge funds), who have been enjoying this period of ZIRP (zero interest rate policy) and have been riding high on the big gains in their portfolios over the past six years. The “pros” are among the most likely to suffer from rate rage, because once interest rates start to rise, the period of easy money will draw to a conclusion. After that time, the big shots will no longer be able to borrow money for nothing and then invest it to earn more. In fact, when interest rates start to rise, the masters of the financial universe will be forced to return to the mundane world, where old school financial analysis is necessary to score investment returns.
That’s why “rate ragers” are hyper-focused on every word uttered by Fed officials. One large hedge fund manager postponed a scheduled interview last month, because he was pouring over an 18-page (more than 4,000 words) treatise penned and delivered by Fed Chair Janet Yellen. Let me spare you the gory details and boil down what she said: The central bank will raise short term interest rates later this year; and once it does actually happen, the pace of increases will be gradual and will depend on economic conditions. In other words, Yellen told us what we already knew.
For those suffering from rate rage, perhaps the only solace is to recall that the rationale behind rising rates is that things are getting better. And because the process is likely to be a slow one, the U.S. economy should still be able to expand to its historic, post-World War II pace of 3 to 3.5 percent from the 2.2 to 2.4 percent seen over the past three years.
As the economy firms, companies’ will be forced to increase wages to retain and attract talent. That means that their profits will be curtailed in the short term and their stock prices could suffer accordingly. Before you start worrying about your retirement account, remember that this six-year bull market cannot continue forever.
And despite the market volatility, I’m guessing that most workers would gladly trade a bump in pay for an extra couple of percentage points of gains in their retirement accounts this year. Presumably, as Americans earn more money, they will eventually spend some of it, which should help companies earn more. As companies earn more, perhaps they are likely to increase pay and add jobs, which would lead to even more consumer confidence and spending. In other words, after six long years, we could finally see the beginning of the much-hoped virtuous cycle, the antidote to rate rage.
Jill Schlesinger, CFP, is the Emmy-nominated CBS News Business Analyst. A former options trader and CIO of an investment advisory firm, Jill covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, “Jill on Money.” She welcomes comments and questions at firstname.lastname@example.org. Check her website at www.jillonmoney.com (c) 2015 TRIBUNE CONTENT AGENCY, LLC
This was printed in the April 19, 2015 - May 2, 2015 edition.