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The Fed's April Fools

Posted: Apr 1, 2013 10:24:04 AM

Over the last few years both equities and fixed income have done well. The returns over the last 3 years for equities averaged 10.9% and fixed income at 6.2%, ending on 12/31/12.  Historically, fixed income and equities do not usually move in the same direction.  Equity markets are moving to new highs and are usually a good predictor of the future, but bond prices should be falling and yields should be moving higher. 

 

So why are the equity and fixed income markets moving in tandem? The Federal Reserve has kept yields artificially low by buying trillions of dollars of debt.  If the economy keeps improving, the rubber will meet the road eventually and fixed income yields will probably rise. We do not know when, but certain instruments, like treasuries, would not be a good place to park your money for the foreseeable future. A potential substitute for certain fixed income investments would be an “absolute return” hedge fund of funds. As for equities, the old saying of “Don’t fight the Fed” has never been more accurate. Equities should continue to do Ok , but one should be mindful of the increasing US debt which will eventually affect our ability to grow.

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