What's Going On

In 1971 Marvin Gaye released the hit album "What's Going On" with the hit single of the same name. The single topped the Hit Souls Singles list for 5 weeks and made it to the #2 spot on the Billboard 100 list. The album sold 2 million copies and is recognized as an important work in the history of police brutality in the black community. Irononicaly even though the words of the song pleaded for peace within his family, Marvin was eventually murdered by his abusive father. Many people are wondering what's going on in the stock market today. While I don't pretend to have all the answers, I take a big picture approach to understand and react to the mass selling of stocks. First of all, interest rates are going up radidly and will most likely continue to rise for much or all of this year. This means that alternatives to stocks are starting to look interesting for the first time in several years. Even though your local bank or credit union may not offer an attractive interest rate on savings accounts or CD's, the treasury market and some brokerage CD's are starting to look interesting. The big question people are asking is "how high will rates go". Many economists insist that the federal funds rate must equal the rate of inflation. With the current inflation rate around 8% and the current range of the fed funds rate at .75 to 1%, it seems that the Federal Reserve has a lot of work to do still. This means a lot more pain for stock market investors because money will be flowing out of stocks and into safer investments. The task at hand for Jerome Powell who is the Chairman of the Federal Open Market Committee is to muffle demand for goods and services by sopping-up liquidity in our economy. If people have less excess capital, they have less to spend thereby lowering demand for products. Given the amount of rate hikes needed to acomplish this, a recession is highly likely in my opinion. Over the past several years I have been carrying high cash balances in money markets which have basically yielded nothing. It's times like this that I am glad I took such a conservative approach to investing. I now have some cash to start buying safe products like FDIC insured CD"s and treasury bills of relatively short duration. Even though I expect rates to go much higher, I am satisfied with some current income while I build a ladder of fixed income of increasing duration over time. I have not been selling stocks during this carnage because I like the way I am positioned for the most part. My dividend paying stocks still yield more than any fixed income available and I expect these quality companies to recover when this interest rate cycle is over. In conclusion, I have always taken a hands off approach to investing until a paradigm shift occurs. The big change happining now is that interest rates must rise and the economy will slow as a result. That being said, I won't make any sudden or drastic moves. I liken my money management style to a pilot of a very large ship in the ocean, changes in course are accomplished by subtle bumps of the steering wheel. Any sudden moves can result in disaster. While my style of investing may not be suitable for every investor, everyone will be affected by what is going on in the current economic climate. I am content to continue to add to my fixed income portfolio and collect interest while navigating these choppy seas.