The Fed Deserves an Oscar
It was a clever bit of acting this week by Federal Reserve Chair Janet Yellen and her troupe of governors that would convince us a return to normal, higher rates is almost at hand.
But by now income investors should recognize that backstage the Fed is clinging to low rates as the U.S. economy is still too weak to significantly raise them.
In fact, the Fed revised its estimates for U.S. GDP growth for 2016 to 1.8%, down from 2% in June. Though Yellen would have you believe the economy has turned the corner, the economic record is mixed at best.
So at Investing Daily’s Personal Finance, we continue to think our Income Portfolio filled with strong, dividend-paying stocks is the place to go for income. And as the steward of that portfolio I’m stocking it with investments that can offer the type of income stability that the government once offered and now clearly cannot.
Even if the Fed begins to raises rates at the end of the year, they will be so low for so long that they won’t be enough to generate a decent return for an income investor for years. In fact, only one increase is anticipated this year, two next year, and three in 2018 and 2019. Just a few months ago the expectation was two rate increases in 2016, three in 2017 and three more in 2018. What happened?
Reading between the lines, the Fed’s latest announcement is that the central bank lowered its estimates for long run economic growth as well as for the path of interest rates.
Given this, investors should be concerned that even as meager as the proposed rate rise is for December – a raise of a quarter percentage point, to between .5% and .75% – it could cause the U.S to fall into recession.
We think this because various economic indicators show only marginal improvement in the U.S. economy.
Here are indicators we’d like to see improvement in before we’d have faith in a strong recovery, and before we’d expect the Fed to normalize interest rates:
Business Capital Investment: There’s a disconnect between so-called strong hiring and business investment. You can’t have confidence in the employment numbers if business investment is at an all-time low. According to a report by Standard & Poor’s, capital expenditures across all industries fell 10% in 2015 and will continue declining, though at a slower pace, dropping to 4% in 2016 and to 2% in 2017.
Business Creation: Startups businesses or business creation is an important component to a healthy economy, as they create many of the new jobs. But according to a Kauffman Foundation research report issued last year, the country’s rate of new business creation, which peaked about a decade ago, plunged more than 30% during the Great Recession and has been slow to bounce back.
Corporate Profits: A disturbing trend in the last few years has been the persistent declines in revenues of many corporations, which is being followed now by declines in profits.
Gross Domestic Product: I like GDP because no matter how bulls or bears spin metrics, you can’t ignore the economy’s big picture. The Federal Reserve cut the U.S. economic growth forecast to 1.8% for 2016, which is lower than the 2% general level of growth over the last few years.
Put all these together, and as we have concluded at Personal Finance, income investors would be wise to pivot their portfolios to the safety of our strong dividend-paying stocks.