There are two questions investors may have following yesterday’s rate hike. The first is: What happens next? The second is: What do I do now? The short answers are: Don’t put too much faith into the forecasts and enjoy the marginally higher level of interest income, but don’t make big changes. I will expound on both answers.
In regard to the first question, a bit of context is useful. Yesterday’s increase was just the second in a span of more than 10 years. As you probably recall, a 25-basis point (0.25%) increase was announced last December. What you may not remember is that the second most recent increase was announced way back on June 29, 2006. Between then and now, there has been a large number of forecasts proven to be wrong and a large number of forecasters who kept making incorrect forecasts.
Even the Federal Open Market Committee’s (FOMC) members haven’t displayed much in the way of soothsaying skills. The first chart on your right (aka, the Fed dot plot or simply “the dots”) shows last December’s target levels for the federal funds rate. Described differently, the dots represent the individual interest rate forecasts for each year. As you can see, most committee members were forecasting interest rates to be above 1.0% by now. Yesterday’s announcement raised rates to a range of just 0.50% to 0.75%. (To quote Homer Simpson, “D’oh!”) The second dot plot is the latest forecast made by FOMC members. Do you believe the committee’s crystal ball has become clearer? I don’t. Continue Reading »
AAII Model Portfolio Update
Following quarterly his portfolio review, AAII founder and chairman James Cloonan removed one stock from the Model Shadow Stock Portfolio: Marlin Business Services Corp. (MRLN). The stock was removed because the company is primarily involved in leasing and rental operations, and is now being treated as belonging to the financial sector. (The Shadow Stock portfolio avoids financial stocks.) In its place, two stocks are being added: RCI Hospitality Holdings (RICK) and Roadrunner Transportation Systems (RRTS).
In addition, three other existing holdings are listed as “qualitied,” meaning they met the portfolio’s buy rules as of the end of November. Those stocks are AV Homes Inc. (AVHI), Seneca Foods Corp. (SENEA) and VOXX International Corp. (VOXX).
The Model Shadow Stock Portfolio, which is a real-money portfolio of micro-cap value stocks, added 12.2% in November. Year to date, the AAII Model Shadow Stock Portfolio is up 23.5%, compared to the S&P 500 as represented by the Vanguard 500 index fund (VFINX), which is up 9.7%. The DFA U.S. Micro Cap Fund (DFSCX) is up 20.7% for the 10 months ended November 30. Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 15.8% versus the Vanguard 500 Index fund, which as gained 9.0% a year, on average, over the same period.
The Model Fund Portfolio climbed 6.1% in November, compared to a 3.7% gain for the SPDR S&P 500 ETF (SPY). The Model Fund Portfolio has gained 13.3% year to date, while the SPDR S&P 500 ETF is up 9.7%. Since its inception in June of 2003, the Model Fund Portfolio has a compounded annual average return of 8.6%, while the SPDR S&P 500 ETF has an 8.4% average annual return over the same period.
There were no changes to the Model Fund Portfolio this month. The next quarterly review of the Model Fund Portfolio will take place in February 2017.
More on AAII.com
- Building a Balanced Portfolio: An Unconventional Approach – Adding commodities and inflation-protected bonds to a traditional stock/bond portfolio helps to smooth volatility over a variety of market environments.
- Dividends Are Still Valuable – In this 2015 AAII Journal article, John Buckingham shared research showing that dividend-paying stocks perform well 12 months following a rate hike.
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Highlights from the AAII Journal
- Asset Returns During High and Low Inflationary Periods – Commodities, real estate and small-cap stocks have outperformed when inflation was high, as Craig Israelsen explains in this month’s AAII Journal.
- The Individual Investor’s Guide to Personal Tax Planning 2016 – Our new tax guide is now online, just in time for your year-end tax planning.
AAII Sentiment Survey
Neutral sentiment fell to its lowest level since November 2014, and is currently near the bottom of its typical range. More about this week’s results.
This week’s results:
Bullish: 44.7%, up 1.5 points
Neutral: 23%, down 7.4 points
Bearish: 32.3%, up 5.8 points
Take the Sentiment Survey.
What’s Trending on AAII
- How Interest Rate Changes Affect the Price of Bonds
- Choosing Between Mutual Funds and ETFs
- The Individual Investor’s Guide to Personal Tax Planning 2016
The Week Ahead
We’ll start to see earnings results from the traditional season early reporters. Dow component Nike (NKE), which will report on Tuesday, as well as 13 other S&P 500 members (including FedEx (FDX), also on Tuesday) are on the calendar.
The week’s first economic report will be the November existing home sales, which will be released on Wednesday. Thursday will feature November durable goods orders, November personal income and spending and the second revision to third-quarter GDP. November new home sales and the revised December University of Michigan consumer sentiment survey will be released on Friday.
The Treasury Department will auction $14 billion of five-year Treasury inflation-protected securities (TIPS) on Thursday.
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! Click here for information on upcoming meetings.
AAII Members Receive Tax Guidance
The December AAII Journal features our popular tax guide. This annual guide helps investors stay up to date with the ever-changing tax regulations, includes last-minute reminders for 2016 and provides tax strategies for 2017.
It will help you understand your current tax liability and what you can do to potentially lower your tax bill this year and next year.
Start your AAII membership today to get The Individual Investor’s Guide to Personal Tax Planning 2016, and to benefit from everything AAII has to offer.