Rate Hikes, Inflation and What You Earn


Yesterday’s interest rate hike by the Federal Open Market Committee was the third in a 15-month period. More notably, it was just the third rate hike since the financial crisis. The rate hike represents another step in the (so far) very gradual removal of stimulus. At current levels, rates remain low on a historical basis and allow the FOMC plenty of room to continue raising rates if economic growth continues. In saying this, I should add that I remain on the “I believe them when I see them” bandwagon. In other words, to paraphrase Fed chair Janet Yellen, my view is dependent on future Fed statements.

By raising rates, the Federal Reserve is trying to get ahead of potential future inflation. There is a lagged effect to rate hikes. Furthermore, unlike drug trials, we can’t run a control group study. We’ll never know how the economy would have actually evolved if the Fed were more aggressive or dovish with rate hikes. Despite all of the research and economic theories, interest rate policy has been and will continue to be trial and error. There are simply too many external factors to say with absolute certainty what the best decision is at any given point in time.

For us as investors, the rate hike is a double-edged sword. It creates the opportunities for higher interest rates on our cash savings. This will be welcome, as BankRate.com listed the national average as a still-paltry 0.11% as of Tuesday morning. (AAII members can earn 1.01% through our affinity program with Discover Bank.) Bond yields are also rising, with the 10-year Treasury note recently hitting a two-year high. This is good for those buying bonds. To the extent that interest rates are being driven upward by a strengthening economy, stocks could be helped. The downsides are lower prices on currently held bonds (yields and prices are inversely related) and a tapping on the economic growth brakes. Utility and telecom stocks could also see selling pressure as the interest rates on bonds begin to look more attractive. Corporate borrowing (and personal borrowing) will become more expensive. Continue Reading »

AAII Model Portfolio Update

No changes were made to either the Model Shadow Stock or the Model Fund portfolios.

Three stocks in the actual Model Shadow Stock Portfolio meet the initial selection criteria: Townsquare Media Inc. (TSQ), Salem Media Group (SALM) and Seneca Foods (SENEA). L S Starrett (SCX) remains on earnings probation. PCM Inc. (PCMI) turned in the the strongest performance among the Shadow Stocks in February, gaining 19.8%, and is now approaching the value limit for the portfolio.

The Model Shadow Stock Portfolio was basically flat for February, ticking downward by 0.05% as small-cap value lagged other strategies for the month. Since its inception in 1993, the Model Shadow Stock Portfolio has a compound annual average return of 15.8% versus the Vanguard 500 Index fund (VFINX), which has gained 9.2% a year, on average, over the same period.

The Model Fund Portfolio gained 2.7% in February, compared to a 3.96% return for the SPDR S&P 500 ETF (SPY). Since its inception in June 2003, the Model Fund Portfolio has a compounded annual average return of 9.0%, while the SPDR S&P 500 ETF has an 8.8% average annual return over the same period.

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Highlights from this month’s AAII Journal

AAII Sentiment Survey

Pessimism among individual investors fell from last week’s AAII Sentiment Survey, while bullish and neutral sentiment rose. More about this week’s results.

This week’s results:

  • Bullish: 31.2%, up 1.2 points
  • Neutral: 30.1%, up 6.6 points
  • Bearish: 38.7%, down 7.8 points

Historical averages:

  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

Take the Sentiment Survey.

The Week Ahead

Only nine members of the S&P 500 are scheduled to report. Included in this group is Dow Jones industrial component Nike Inc. (NKE) on Tuesday.

The week’s first economic reports will be February existing home sales, which will be released on Wednesday. Thursday will feature February new home sales. February durable goods orders and the March purchasing managers’ index (PMI) composite flash will be released on Friday.

Seven Federal Reserve officials will make public appearances: Chicago president Charles Evans on Monday and Friday; Kansas City president Esther George and Cleveland president Loretta Mester on Tuesday; chair Janet Yellen and Minneapolis president Neel Kashkari on Thursday; and St. Louis president James Bullard and San Francisco president John Williams on Friday.

The Treasury Department will auction $11 billion of 10-year Treasury inflation protected securities (TIPS) on Thursday.

Local Chapter Meetings

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you! Upcoming Meetings »

Join AAII and Receive Winning Model Portfolios

Investing the “AAII Way” has always been about distilling current financial theory and academic research into knowledge that our members can act upon. As a member of AAII, you’ll receive monthly updates on the holdings, performance and investment strategies behind our real-world portfolios.

AAII Model Shadow Stock Portfolio:
32.4% one-year annualized return*

Free Guide–New members are rushed a special guide to our model portfolios. This guide acts as an invaluable “cheat sheet” for those who want to quickly build a personal version of their own AAII stock or fund portfolio.

*Results as of 2/28/2017.


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