I’m back from a couple weeks out west and a conference on 401(k)s, so if you haven’t seen a post for a while, that’s why.
The stock market has dropped 8 of the last 12 sessions. The bond market has also dropped sharply in the same time, in many cases wiping out the year-to-date (YTD) gains for bond funds.
The primary cause is the same for both markets – worries that the economy is strengthening enough that Federal Reserve Chairman Ben Bernanke can quit giving banks and the US Treasury Dept so much money by buying their bonds. This is actually what is meant by “printing money.” The Federal Reserve creates the money to pay the banks and the Treasury Dept. for the bonds it buys from them.
Much of this money given to banks has gone straight to their trading desks to buy stocks and bonds. Without that flow of Fed money, the worry is that a big source of demand for stocks and bonds will be missing. You know the old price model – lower demand for anything leads to lower prices unless the supply has also changed.
This recent move is exaggerated by the terrific performance of stocks YTD, up 18%. A run that big, that fast, is ripe for profit-taking. It only takes a trigger and in this case, it is the worries I mentioned above.
What should you be doing now? Call me, because it depends a lot on your portfolio, who you are, and what your circumstances are.