It is still early, but the question has been proposed concerning whether the country is poised for a federal rate hike. This is a multifaceted question, and I will attempt to touch on some concerns and considerations in doing so (or in not doing so).
First off, Yellen is cautious. I would say overly cautious at times to the point of missing crucial timing. However, this is understandable given the most recent economic downturn and its unique attributes. Do I think she will raise the Federal Funds Rate come March? No, but no one can say for sure and the minutes from February won’t be released until 14:00 today. Though there are signs of economic growth and the tide has turned from a year ago. America as a whole is sitting in a better position, but this does not account for everyone individually, or all local and regional areas.
Second, there is talk of increased consumer spending. This is positive, right? And contributes to economic growth? Yes, this is true and increased spending power is a positive change. It fuels the whole system and benefits the overall economy from workers, to businesses, to banks. Where concern lies is in the purchase of fixed assets through financing and an increase in debt levels. To put it simply, do not buy something you can’t afford unless you have no other alternative. For instance, don’t buy a home at the bank approved loan amount if it does not fit into your budget. Ditto on budgeting for a vehicle. Don’t make payments on anything you could pay for upfront. And do not use all of your savings or emergency funds unless it is necessary, or you have a backup plan in place.
In terms of transportation, hearing the term “subprime car loans” and an expected increase in defaults is of concern. However, it is not as simple as that. People need vehicles to get to work, to take their kids to school, and to buy groceries. It is just a fact. Public transportation is limited in many areas of the country and it puts pressure on consumers to purchase these depreciable assets, even if it severely tightens their budget. An emphasis on increasing transportation for citizens needs to become a priority for governments. In terms of subprime loans, as long as I don’t hear about them being packaged up into financial products, I think we will be alright.
As far as the market hitting record levels, this is positive for investors with great timing. Seeing returns and investment in business will continue to spur economic growth. However, timing is key. What goes up, must come down. For the time being, I will remain more vigilant than usual, but still see room for growth. Just remember, the economy has a cycle. A somewhat unpredictable cycle, but one at that.
There is some talk of volatility, at times measured by different indices (e.g. VIX). There are also unique market fluctuations as a result of political moves. This makes it difficult to discern the level of volatility, but being aware and cognizant of changes appears to be more vital than ever. Throughout the year, also take into account policy changes, job growth, consumer spending, interest rates, and global relations, but I would say, don’t take statistics at face value. Also, consider whether you are acting hastily or not. I always say that investors are fickle and are quick to respond (i.e. investor psychology), but it is important to aware of typical and atypical fluctuations, as well as what triggers those and how long they might last.
Lastly, volatility in foreign markets should be considered, and emerging markets not so quickly dismissed. I will be looking for opportunities and using my cautiousness to explore alternative strategies and levels of risk involved, depending on how everything unfolds.
*Remember, we still have three weeks to go until the next meeting…and minutes don’t come for another 15 minutes. And most importantly, remember that I am not dispensing any advice in a professional capacity. Strictly opinions here, and opinions only.
– Erica O.