As 2012 fades into the memory banks, the financial markets of 2013 are beginning the year in a very similar fashion to last year. Despite estimates for the U.S. economy to grow at a tepid 2% pace, along with a deepening European recession, stock markets around the world are off to a very optimistic start in the new year.
These strong markets are being driven by the “developed world’s” central banks unending policy of money creation. Essentially, the USA, UK, Switzerland, Europe and Japan are attempting to inflate their economies out of their economic malaise. Domestically, Ben Bernanke and the U.S. Federal Reserve Bank are printing $85 billion every month and then purchasing that same amount of U.S. Government and Government Agency bonds. This ongoing effort of financial market manipulation, to keep interest rates low, encourages investment capital to move out of the safety of money markets, treasury bills and C.D.’s and into the riskier investments of stocks and real estate. Unfortunately, the central bank’s bond-buying-strategy cannot continue indefinitely and must end at some point. Like an addiction, the longer the market manipulation, the more reliant the financial markets become on it and the more vulnerable these markets are to future volatility. We do not expect the Federal Reserve Bank to change their levels of bond purchases any time soon, but as the “when to reduce and/or stop the policy” debate continues, the markets are likely to become increasingly nervous. Until our U.S. Congress and President come to a long-term resolution on the budget deficit, the markets will move in fits and starts.
In recent months, we have been shifting more investments into inflation sensitive securities, while reducing our bond holdings. Pacific Wealth Management believes these extraordinary times continue to make prudent diversification an essential part of our wealth preservation strategy.