During the course of the pandemic pandemonium we’ve seen some remarkable recovery across the major markets. As we have noted more than a couple of times, some of the market’s best gains have been in reaction to things in the news that weren’t actually good news at all – they were just less bad than forecasts had us expecting. One has to wonder just how much fuel may be left in this sort of psychology. At some point we are going to have to have some bona-fide good news because, absent that, the markets will remain stalled.

Forgive us for repeating it but it’s a good time to remember that the economy is not the market and the markets are not the economy. BUT, over time they are inextricably tied. Positive and/or negative events in either arena will eventually show up in the other. Recently we have seen what could be regarded as a diversion or disconnect. Social unrest in the streets of many major US cities is certainly a cause for alarm. When our citizens are in danger of bodily harm, and their property destroyed we are all diminished.  We cannot suffer such social illnesses and not see economic injury as well. And yet, markets have seen some robust performance right alongside the turmoil. This dichotomous condition cannot be sustained. Fortunately, most of the hotspot cities are regaining stability. Unfortunately, much of the media as well as the general public seems to be only able to concentrate on one thing at a time. As images of protesters diminish, we are seeing a 2nd wave of coronavirus / Covid-19 headlines. It is important to note that the 2nd wave is much more evident in amount of media coverage than in actual fact. While number of cases has ticked up in some states, we need to interpret this data carefully. Hospitals are seeing a lot of patients who had delayed elective procedures and other treatment. It goes without saying that many of these patients are not 100% healthy and are more likely to have acquired Covid-19 than the general population at large. If the spikes are unduly influenced by this situation, we’ll see the numbers settle down within a few days. Meanwhile, the markets are taking the time to focus again on Fed Chair Powell’s comments of this week:

  • In his second day of Congressional testimony, Fed Chair Jerome Powell encouraged the legislature to continue fiscal support to the economy, saying that it’s now at “a critical phase.”
  • Fiscal support is having a positive impact on the economy, but he’d be concerned if Congress withdrew its support too quickly, he said at his testimony before the House.
  • Tuesday, in his testimony before the Senate, Powell repeated his view that both Congress and the Fed would probably need to take more action.
  • Negative interest rates aren’t appropriate for the U.S. But this time he added that he’s not saying the Fed would never use the tool that’s been used in Japan and Europe.
  • “Over time we’ll gradually move away from ETFs and move to buying bonds,” he said. “It’s a better tool for supporting liquidity and market functioning.”
  • Powell reiterated the Fed isn’t thinking at all about raising rates right now and is committed to support with low rates, asset purchases and lending until the economy is “fully recovered”.
  • “We want to be back where we were in February,” he added.

Our takeaway is generally one of increasing comfort. It’s a good thing when tension is low between the Administration and the Federal Reserve. The recovery appears to be well on track.

Ron’s Market Minute — When Will Interest Rates Return to Normal?

Years ago, I used to joke during seminar presentations about the interest rates provided to savers from banking institutions. I would ask people how much they were paying banks to hold their money, and people would laugh. Today, however the joke has taken on some iota of truth: Although ‘savers’ are not yet paying the bank to hold their funds, it looks like we’re nearly there. 

Today’s bankrate.com website shows a highest rate on a $25,000 5-year certificate of 1.51%, so it’s not surprising that many questions that we receive from clients and others sound something like ‘Is there anywhere that I can get a reasonable interest rate on my emergency funds in a savings account?’ or perhaps something like ‘When will interest rates return to normal?’ 

Some people argue that after the pandemic passes, world-wide deficits, concerns regarding debt sustainability and higher inflation will push rates back up (perhaps even above) pre-pandemic levels. On the other hand, some argue that the current savings glut and yield control by central banks will keep rates low for a much longer time. Who’s right?

A recent paper published by Alan Taylor of the San Francisco Federal Reserve Bank studied interest rate actions and reactions after major pandemics (that cost more than 100,000 lives). The data goes back to the 14th century so it includes the Black Death (1347-1352 with 75 million deaths) as well as the more current Spanish Flu (1918-1920 with approximately 100 million deaths).

Of course, this time may be different – though the authors conclude that rates dropped during pandemics and stayed lower for longer time periods than could have been reasonably foreseen. 

From a more practical perspective, there is that saying ‘Don’t fight the Fed’ which means follow the moves and expectations of the Federal Reserve.  At the most recent Fed-talk the members seemed to be in agreement that rates are unlikely to be any higher for at least the next several years.

So, bottom line, it appears rates are unlikely to see much higher choices any time soon. You can, of course, visit with your rep for alternate ideas on where to put your emergency dollars.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

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