If you were paying attention to the markets last week (6-17 to 6-21), you saw some pretty big losses all over. The Dow lost 350 points in a single day, gold got slammed, and bond prices took a nosedive. What is going on?
It turns out that Mr. Bernanke (head of the Federal Reserve) made some public comments on how the Fed is planning on reducing its most recent stimulus spending by 2014. At this point, the Fed is printing $85 billion of new money each month to prop up the economy and the markets. Well, they are finally deciding to put an end to that.
I’m sure you have all witnessed some examples of bad parenting. Sometimes, this comes in the form of spoiling a child. Can you imagine a teenager who gets a very nice allowance, yet has no responsibilities to earn any of it? Now imagine that parent, at a moment’s notice, just taking away the allowance. What do you think that teenager will do? I’m guessing they might rebel in some form, and probably for quite some time if they’re really spoiled rotten.
Well, guess what? The government (parent) is starting to take away the money, and the child (the markets) are starting to rebel. Sometimes, people forget that a government that tries to print money to solve its problems will only delay the problems. There will be a day of reckoning.
The problem is that the stock market, bond prices (and gold) are all priced as though the Fed was going to continue printing money indefinitely. Certainly, we all know the economy isn’t doing well enough on its own to support all this market growth! All these prices are up simply because there is more money in the system.
But the Fed is now planning on turning off the printing machines, and that makes the markets very sad. The big question now is, what will happen next?
Will the stock market finally turn into a big, old, mean bear? It sure wouldn’t surprise many if it did.
What about bond prices? Stopping the printing press means that interest rates will likely rise. That’s likely to be bad news for bonds.
And gold what about that so-called “safe haven?” You might expect additional lows to come along there also.
So, where is a person to turn? What will make money in this environment?
Like it or not, look for insurance company programs to shine. Fixed annuities and life insurance should continue to do well in this type of environment. Why? Because insurance companies are in the business of risk management, and it's times like these where they really show off their expertise.
If you haven’t positioned a chunk of your assets in insurance-based accounts, now is the time to look into it. But be careful; there are good products and not-so-good products out there. Make sure you have your investments reviewed by an independent expert in this field.