I’m writing this just prior to two interesting milestones: Britain’s “Brexit” referendum on whether or not to pull out of the European Union, and our own country’s annual celebration of Independence Day. The timing is pretty ironic when you consider the latter milestone was the result of our forefathers declaring their independence from Britain some 240 years ago. That was a momentous occasion in global history, of course, and led to the founding of our nation, which is what we still celebrate every July 4th.
By the time you read this, the global repercussions of the “Brexit” vote – if any – will probably be clearer, but as of this writing there remains a lot of worry and uncertainty about what Britain’s decision could mean for the global economy. In fact, Fed Chairman Janet Yellen, in an address to the Senate Banking Committee on June 21st, cited that uncertainty as one factor in the Fed’s decision to vote against another short-term interest rate hike one week earlier.*
Yellen told the committee, and Congress one day later, that global risks such as potential fallout from “Brexit”, along with domestic factors like a slowdown in job growth, warrant a “cautious approach.” As you know, the Fed instituted a quarter-percent rate hike in December with the goal of raising rates further by the end of 2016. I explained at the time that I believed the Fed only voted in favor of the marginal hike because Yellen knew Wall Street was expecting it, and she didn’t want to risk the possibility of causing a stock market plunge.
This time out, Yellen’s cautious tone was expected, and the markets held fast in the wake of her remarks.** At the same time, though, all the unsettling factors that I’ve talked about in previous articles also remained in place: market volatility, thin trading volume, and a strong resistance level against further growth. That resistance level has been in place pretty much since the third round of quantitative easing ended in October of 2014.
But the main disturbing characteristic that remains evident in the stock market is its glaring disconnect with economic realities. Despite a historically dismal start to the year and extreme volatility, the markets have ultimately managed to sustain the modest rebound they achieved in March. Meanwhile, however, our Gross Domestic Product saw its weakest growth rate in two years in the first quarter, corporate earnings came in below expectations, and – as Yellen noted – job growth fell sharply in April and May.
I’ve talked a lot about the factors behind this glaring disconnect in past articles, pointing out that the Fed’s reckless use of quantitative easing was akin to pumping the stock market full of economic steroids. The effects are still evident even a year-and-a-half after “the drug” stopped being administered – partly due to the fact that the rest of the world picked up our bad habits and artificial economic stimulus has become more widely used around the world.
The bottom line in all of this for investors is that the global financial markets remain mired in uncertainty. Keep in mind, our stock market has gone through two sustained drops of 50 percent or more since 2000. Those were devastating for some investors, but they were also consistent with natural cycles that have characterized the financial markets throughout history. I’ve pointed out before that a third major market plunge would be a continuation of these natural cycles, and that the effects of quantitative easing have probably only delayed that plunge, not prevented it.
If you’re over 50, another sustained market drop of 50 percent or more could severely impact your retirement plans if you still have a substantial portion of your savings in the market. The good news is that alternative saving and investment strategies exist that can provide better protection against the potential impact of another major market slide. These strategies prioritize portfolio protection over growth, yet are designed to provide the option of growth through strategic reinvestment.
In my experience, the benefits of a savings plan focused on protection and dependable retirement income, rather than growth, for investors within ten years of retirement are twofold: they give you a greater level of control over your money, and they eliminate a great amount of uncertainty. In essence, they give you an option for “declaring your independence” from unnecessary financial worry and fear as you enter retirement.
In the spirit of Independence Day, and with the global financial markets still mired in historic levels of uncertainty, I submit that right now might be a great time to make that declaration!
“Fed Cautions on Rates Due to Brexit, Hiring Slowdown: Yellen,” Reuters, June 21, 2016
“U.S. Stocks – S&P, Dow – Hold Gains Even as Yellen Paints Bleak Picture,” Reuters, June 21, 2016