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With the Fed' exit strategy still unclear it was hard for advisors to know what to tell their clients. In this situation, Andrew Patterson at Vanguard recommends diversification to "offset large swings in equity returns." "The 'cushion' they provide may not be as thick as it has been in the past, but bonds do still provide protection in your clients' portfolios," he says. The main takeaway for advisors then is that "tapering alone does not signal an increase in interest rates."
"Markets and economic conditions work to determine interest rates across the yield curve while monetary policy reacts to economic conditions. While interest rates will likely increase, we do not know with certainty when or at what speed. The Fed's exit strategy won't just zoom ahead once it's been placed in drive. Instead, the Fed will be constantly analyzing economic conditions and adjusting policy accordingly."
JP Morgan analyst Tom Lee has been bullish on stocks for some time and said that yesterday's decision showed many traders continue to be underweight on stocks. Lee identifies four reasons the Fed's decision will support the stock market into the end of the year.
1. "Interest rate expectations have been lowered, providing some support to housing, interest rate sensitives (even autos), lowering corporate bond yields and even the dollar weakened (supporting exporters)." 2. "Fed has provided some insurance against risk into year-end. An additional positive for equities is that the Fed is providing support for markets into a somewhat riskier period given the upcoming debt ceiling/budget debate and the pending nomination of a new Fed Chairman." 3. "The right groups rallied today, with builders, Cyclicals leading and not solely “bond proxies." 4. "The rally showed investors are [underweight] risk, including equities."
Advisors Need To Discuss A Budget With Their Clients (The Wall Street Journal)
In today's uncertain job market, it's possible that some might not be able to delay retirement. That's why it is important for advisors to talk to their clients about having a budget to limit their expenses, writes Kevin M. Reardon, president of Wisconsin-based Shakespeare Wealth Management in a new WSJ column.
Advisors can do this by explaining that the nature of expenses has changed in the last 25 years. They should also points out that wages haven't grown much in the past ten years and it was easier to save before. "One of the saving tools I like to suggest is to go back to the age-old envelope system. Take out actual cash and put it in various envelopes labeled for different purposes for the month: gas, groceries, entertainment. Once the money is gone, then you're done spending until the next month," Reardon writes.
FINRA Approves Proposal Requiring Brokers To Disclose Compensation (FINRA/Business Insider)
The Financial Industry Regulatory Authority (FINRA) has approved a proposal requiring brokers to disclose their compensation when they switch firms. "This proposal is about making sure the customer can make a fully informed decision to follow a broker to a new firm and understand the costs associated with transferring his or her account," said FINRA chairman Richard Ketchum in a press release. "This proposal reflects our commitment to transparency and investor protection."
Simon Roy, president of Jemstep, previously told Business Insider that the legislation is slightly self serving since FINRA is an industry self-governance body and wirehouses have seats on the board. "The proposed legislation is expected to reduce poaching of productive brokers from their ranks which could reduce broker compensation costs and increase firm profitability," he said. The proposal will now be submitted to the SEC for review and approval.
FLECKENSTEIN: 'All Hell Is Going To Break Loose' (King World News)
Bill Fleckenstein, President of Fleckenstein Capital, told King World News that the Fed is trapped. "Since April, the 10-Year has gone from about 1.6%, to as high as 3% recently. Now we have to see when this rally in bonds stops. The bond market will then roll over and then the Fed won’t have the tapering as an excuse. It means the bond market has ceased to price in the scenario that the Fed wants, and the bond market is not responding to the Fed’s moves in the short-run. In the old days we would call that ‘losing control of the bond market.’ And if that starts to happen, all hell is going to break loose."
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