Yellen’s remarks before the committee on Tuesday were generally perceived as dovish on interest rates, which helped push the Dow Jones Industrial Average and S&P 500 to new records, and the Nasdaq Composite to its third-highest close ever.
She seems to be extraordinarily cautious. She talked about lagging indicators and that she’s not going to make a decision based on a short-term period of data. Janet Yellen‘s prepared statement also said U.S. labor markets have room for improvement, and low oil prices will be a significant benefit to the economy. The Fed also would like to be confident that inflation will rise to 2 percent before it raises rates.
According to CME Group data;” Fed funds futures are now pointing to the best chance of the first U.S. interest rate hike being in October. Futures now assign a 69 percent probability for October and a 48 percent probability to a rate hike in September.”
The markets are not worried about one rate increase but how fast will the Fed bring rates back to normal levels. An accelerated raise in rates could cause the U.S. economy to fall into another recession.
“Yellen has left herself an “enormous amount of flexibility,” Art Cashin, director of floor operations for UBS at the New York Stock Exchange, told “Squawk on the Street.” Cashin said he thinks there is a 50-50 chance that the Fed will raise rates this year.
The Federal Reserve has a duel mandate, controlling inflation and full employment. My gut tells me that the higher value of the U.S. dollar, lower gasoline prices and lack of wage growth will keep inflation below the 2% level. The employment numbers hide the fact that many Americans have stop looking for work and are no longer counted in the figures. Plus many Americans are underemployed, they are forced to take lower paying jobs just to make ends meet.
I still don’t like bonds even in my retirement accounts. Bonds offer very little protection against inflation and the after tax return is negative when I take the money out of my retirement account. I believe that the bull market in bonds is over and I would rather buy good quality dividend paying stocks.
Two stocks on my watch list;
VERIZON (VZ) dividend yield 4.5%
AT&T (T) dividend yield 5.5%
In order to get a higher yield in the bond market, you would have to buy;
SPDR BARCLAYS HIGH YIELD BOND (JNK) dividend yield 5.9% (junk bonds)
The chart below illustrates a one year comparison:
Keep in mind that higher interest rates will have a negative affect on both these stocks and the bond ETF.
What do you think, is the bull market in bonds over?