The holiday season is upon us, and you’re probably making lists for those who have been naughty or nice this year.
While you’re at it, it’s time to make another list…
It’s the income list. You know, the one that will determine how well or poorly your retirement will do in terms of income from your holdings.
I personally believe the best opportunity to lock in the best fixed income for the next five or maybe 10 years will occur in the next 12 months. Let me explain why.
Economic cycles are a fact. This one that we’ve been in for the past decade has been great – maybe the greatest of our lifetimes when you consider that the country was teetering on wholesale financial collapse. The S&P dropped to 676 in March 2009 from a high of 1,565 in October of 2007. From that trough, the S&P has increased fourfold!
But this cycle feels different. Instead of being led by huge expansion, it’s been a debt-fueled rally that has relied on lower-than-normal interest rates for a longer period.
This has made individuals accustomed to low rates. We now consider zero percent interest offers from places like Home Depot or the car dealer the norm, not the exception.
In a recent conversation, a very successful realtor in my area told me that customers are balking at the prospect of a 5% fixed rate on mortgages.
Donald Trump is bashing his own Federal Reserve Chairman, Jerome Powell, for tightening the screws on the economy by raising rates. He even went as far as to say the Fed was a bigger threat than China!
This is all very bad news for natural economic cycles. When the bond markets see inflation on the horizon as a long-term issue, rates on long-term bonds rise in tandem with short-term rates. When this doesn’t happen, the bond market is signaling that any inflation is a short-term issue and slow growth is a long-term fact.
That is what we are facing in the U.S. now: short-term pleasure for long-term pain. Interest rates will top out sooner than later, the bond market is saying. That spells pain for a lot of us who are in or near retirement.
The rates on short-term money have moved between 2% and 3%, as measured by what you can get just for parking cash for two to 10 years. But the amount you can get for 30 years with the same risk-free rate is still just more than 3%. That spread between what you can get for short-term money and long-term money – or lack thereof – is an ominous sign.
It means that investors do not have faith that inflation will cause interest rates to remain elevated. That is why you need to make a list now.
Just as you should always have a list of stocks you want to buy in a crash, you should be ready to pounce on fixed income during a rally.
Interest rates will move up over the next 12 to 18 months. Then they will likely hit a wall – maybe even sooner if the Fed kowtows to Trump. You will miss the opportunity to lock in some higher rates for the next five to 10 years, and rates could start coming down, especially if we enter a recession.
So make that list now of which municipal bonds to buy, which corporate bonds to buy, which Treasurys to buy and which CDs to lock in. You may have only a short window to act.