Both oil prices and interest rates have been on the rise for more than a year, and people of all walks of life are feeling the financial pressures caused by increased costs. Credit card rates are on the upswing as are transportation expenditures, and with what was a seemingly unstoppable housing market beginning to show signs of slowing, the once giddy excitement demonstrated by many financial analysts is turning to consternation. The stock market, which at the beginning of the summer was showing signs of life, has settled into a phase euphemistically termed consolidation, leaving many feeling the opportunities for investment that appeared so abundant just a few weeks ago have closed shop in anticipation of leaner times. Not surprisingly, both professional and individual investors have followed suit, opting to preserve available cash rather than commit it in an environment plagued by so many questions with clearly unfavorable answers. In times like these many are looking for safe havens.
As an investment professional who knows that equities historically outperform virtually all other assets in terms of growth, it is rare that I or any other in the profession caution against increased stock ownership. This, however, is one of those rare periods. How many times have you heard that the primary goal of investing is “to make money”? Unfortunately, sophomoric quips such as this often reinforce irresponsible action by those most ill-equipped to understand the potential consequences.
“First, do no harm”, a phrase that has long served as a proxy for the Hippocratic Oath, is a credo by which physicians throughout the world have practiced for hundreds of years. The investment profession would be well advised to learn from the example set by this most well educated and well respected of groups. The very meaning of responsibility is the ability to provide a reasoned response to defend one’s actions. Given that current corporate and economic conditions do not well lend themselves to a protracted rally in traditional investments, whether real or equity, prudence dictates one look for security. Sure, stock prices may increase in the short run, but God favors very few Davids, so I will wait for my Goliath to become a bit more aged and infirm before picking up my sling.
What should one do? This is a difficult question largely because both the bond and equity markets seem at risk. Interest rates are on the rise putting pressure on the bond market. (Though said rate increases are occurring much more slowly, particularly in the longer maturities, than many had anticipated) Higher borrowing costs also negatively impact stocks and real estate. And higher energy costs affect everything from production to final delivery. It is a quandary. There is, however, a glimmer of hope for those simply waiting for an opportunity, and that glimmer comes in the form of short term fixed instruments. The yield curve is currently quite flat, and thus paper with short maturities is paying nearly as much as fixed instruments with 10 year maturities or longer. The yields on many money market accounts are now approaching 3%, and according to bankrate.com, some 6 month CDs have yields nearing 4%. Given that the 10 year treasury is, as of this writing, yielding less than 4.2%, opportunity may be presenting itself simply as being paid to wait for sunnier days. In investing one can never be sure and there is always a risk of loss, but this is where I am placing my bets.
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