Uncertainties Fade, Opening Door To New Investments

The serious uncertainties that emerged and grew beginning six months ago are now diminishing. The worries about harsh times ahead have shrunk. Actions have been tempered and countermeasures have materialized.

The slow slog at work

Amid the rush to publish sound bites, there are well researched and analyzed articles that explain developments. (For example, the articles published by The Wall Street Journal, The New York Times, and Reuters.)

The quality reporting takes time to read and understand. Moreover, viewing the six-month trend requires daily reading. The major shift has gone from examining statements of what is coming to analyzing developments and results.

Today’s analysis of facts and data reveals disconcerting results. As such, they disprove the original expectations, and they expose the need to take remedial actions. Therefore, today’s environment not only reduces uncertainties, but it also increases positive investment outlooks.

Long-Term Bonds Are Not Bad

Articles about bonds being a poor investment are misleading. Criticizing the 60/40 mix of stocks and bonds is wrong. Why the negative view? The problem has not been the bonds; it has been the Federal Reserve’s interest rate management. The 20-year graph below shows the price only and total returns of the iShares Core U.S. Aggregate Bond Fund ETF (ECD) versus cumulative inflation and various UST yields. (Note that the graph shows a proper period for bond yield analysis: identical yields at beginning and ending, with the price return being about 0%.)

Note that beginning in 2008, when Fed Chair Ben Bernanke first reduced the Federal Funds rate to nearly 0%, bonds began to rise in price, adding to the longer-term bond yields. Then, as the maturing bonds’ payments were reinvested at lower yields and bond yields had stopped dropping (and increasing bond prices), the bond returns became poor. Worse, then, was when Fed Chair Jerome Powell raised rates to fight inflation. Bond prices fell and the low yields continued through maturity.

So, what now? First, Powell is maintaining the current, higher rates. Moreover, long-term bond yields are driven more by Wall Street than the Fed. So, expect the income return to stay where it is for some time. Second, if President Trump gets his wish for lower Federal Fund rates after he replaces Powell (whose term ends in May 2026), bond yields also might decline, thereby raising bond prices.

Stocks Have Potential Excitement Ahead

Expect mixed stock market developments as various economic developments work their way through the various sectors, industries, and individual companies. As has happened in times past, such rejiggering diminishes company leaders and boosts ignored companies. In this market, that would mean the large leaders’ underperformance would undercut the index returns.

If so, expect an eventual shift away from the widespread, popular index funds to actively managed funds run by portfolio managers who seek higher returns. When this shift has happened before, the gains were significantly higher than the indexes, thus producing a dramatic shift in investor and media interest. While such exciting times can eventually top out, they take some time for that to occur. Today, with the S&P 500 Index funds a mainstay, such a shift could last a long time. Moreover, the huge money flow from large stocks could drive the smaller stocks much higher.

The Bottom Line: Investors are ready for a change

Really? Could such a shift happen? Yes, because it has happened before. Remember that stock investing popularity is driven by human nature. Nothing says “Buy!” like rising stocks, optimistic commentaries, and a friend boasting about a quick profit.