The US stock market returns has certainly had a banner year, so far.
We’ve certainly had a lot to worry about such as the fiscal-cliff tug-of war, various European government and political scares, capital flight from emerging markets, tapering of the Federal Reserve bond-buying program, and the US Government shutdown.
And yet the market has maintained its solid march upwards, hitting new highs last week.
But while the stock market has been climbing higher, people looking for income to live on are stuck.
Right now, it’s the toughest environment for generating income in over 100 years.
According to data from Global Financial Data, a portfolio consisting of 60% stocks and 40% bonds has historically generated an average 4.4% yield. Right now you’re looking at an all-time low of less than 2.0%.
Janet Yellen, the new Federal Reserve Chairman, said she’s going to maintain this low interest rate environment.
An astute observer might think that low interest rates seem like a punishment for savers and especially for retirees. And they’d be right.
When faced with a similar question, Yellen said “we have to consider the role of people who have significant savings and their responsibility in society, that it really is selfish to be hoarding it and that we need to create incentives through government for people to spend their savings, because that’s exactly what we need in order to rejuvenate the economy.”
Yes, the new Federal Reserve Chairman thinks people who save their money are selfish. And they need to spend their savings to help boost the economy.
Not only that, at a recent Senate Banking Committee hearing, she said if she could figure out how, she’d even introduce negative interest rates. This means you’d have to pay the bank to keep your money in a savings account, while those taking out a loan would be paid interest by the bank.
You might think this is an incredibly stupid idea. I do.
Regardless of whether she’s right or wrong, the truth is that interest rates are going to stay close to zero for a very long time.
The Federal Reserve is going to maintain its loose monetary policy, which means the bond buying program is going to stay strong. This bond buying injects money in to the economy, and it’s going to end up in stocks and real estate, and continue to push the prices higher.
Meanwhile, the US stock market has gone more than 18 months without a 10% correction. While we are not in bubble territory, as a whole, they are fairly valued.
But that doesn’t mean that prices are going to stop rising here.
Most likely, they’re going to continue their rise for quite a while. As previously explained, rising interest rates won’t stop this increase either.
As always, the best course is to keep calm and stay invested!