As the stock market reaches new highs and housing continues to improve, it is critical for investors to avoid complacency. From the Federal Reserve and Europe to a slowdown in Asia and the upcoming debt ceiling debate, there are numerous potential newsmakers that could lead to increased volatility throughout the remainder of the year.
As you monitor your investment and financial planning strategies, consider keeping an eye on the following potential market-movers.
The Federal Reserve: We have already gotten a sneak peak at how sensitive the markets can be to Federal Reserve chairman Ben Bernanke’s comments. Stocks, bonds and mortgage rates experienced significant volatility after Bernanke hinted the Fed would begin reducing the size of monthly bond purchases due to improvements in the economy and reductions in the unemployment rate. In fact, according to the Freddie Mac Primary Mortgage Market Survey, 30-year mortgage rates jumped from 3.35 percent on May 5 to 4.51 percent by July 11 — an increase of more than 1 percent! An interest rate move of that magnitude reverberates through the entire economy.
While the economy is improving slowly, many economists argue the $85 billion of monthly asset purchases along with the implicit commitment to keep interest rates low has manipulated markets and served as an artificial crutch propping up values — perhaps even creating new asset bubbles. Any suggestion by the Fed that it plans to pull the crutches out from the economy has made investors skittish and resulted in additional volatility.
While the Federal Reserve has attempted to reassure markets that the latest round of quantitative easing coming to an end does not necessarily mean it will be raising short-term interest rates any time soon, the market is not so sure. Since the markets tend to be forward-looking, investors may continue to hang on every word from the Fed regarding when it plans to raise interest rates, as this may be more critical than the end of the latest round of qualitative easing (QE3).
In fact, according to Federal Reserve economists Vasco Cúrdia and Andrea Ferrero, “Our analysis suggests that communication about when the Fed will begin to raise the federal funds rate from its near-zero level will be more important than signals about the precise timing of the end of QE3, the current round of large-scale asset purchases.”
Bottom line — keep a close watch on Bernanke and his comments in the coming months as this may have a significant impact on not only stocks, but the fixed-income market as well.
In addition to the Federal Reserve, investors may want to consider carefully monitoring the situation on Capitol Hill. Lawmakers return from their summer break on Sept. 9 to begin to address budget issues. With both Republicans and Democrats preparing to dig their heels in, it may be likely that the budget debate rages on for some time. As if agreeing on a 2014 budget was not challenging enough for politicians, the United States is also expected to reach its debt ceiling limit of $16.7 trillion by October or November. A government shutdown is a less-than-ideal situation. If this sounds familiar, it is because we faced similar debt ceiling debates in 2011 and volatility ensued as a result.
“The fight over the debt limit in 2011 hurt the economy, even though, in the end, we saw an extension of the debt limit,” Treasury Secretary Jack Lew said on NBC’s “Meet The Press” on July 28. “We saw confidence fall, and it hurt the economy.”
If there is one thing the markets generally do not like, it is uncertainty, and the longer the budget and debt ceiling debate rages, the more volatility we may see.
The Federal Reserve exit plan and the debt ceiling debate are just two of the many potential market movers. Slowdowns in China, the debt crisis in Europe and overall geopolitical issues could all add to uncertainty in the coming months. While there always seems to be something new to worry about, investors should be careful not to overreact to short-term volatility. Consider reviewing your portfolio with your adviser to assess risk, discuss goals and determine the most appropriate long term plan for your unique circumstances.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner & Wealth Adviser. He can be reached for questions at (732) 280-7550 and email@example.com. LPL Financial Member FINRA/SIPC.