We saw some good economic news last week, as the private payroll report showed almost a million new jobs were filled in May. Economists expect the unemployment rate to fall below 6% as a result. While this is still well above pre-pandemic levels, we are seeing consistent improvements. The Federal Reserve Bank also announced that, due to improving economic conditions, they would sell their portfolio of corporate bonds and bond Exchange Traded-Funds. Manufacturing surveys also pointed to strong global growth.
Perversely, the markets dropped slightly in response to all of this good news. Which makes many of us scratch our heads and wonder what is going on. It’s important to remember that the markets are generally very efficient in the long run. A company’s success, and its stock price, is determined by whether or not people buy its products.
In the short run, markets are as rational as the average human, or not very rational at all. Some of this is intentional, as professional money managers look to exploit short-term fluctuations. The sale of the Fed’s corporate bond portfolio is a great example. Looking to back-stop the bond market during the brunt of the pandemic shutdown, the Fed purchased a small amount of corporate bonds. It really wasn’t the amount they purchased, it was the implicit message behind the purchase, that the Fed was not going to allow the market to collapse. Selling that portfolio now is a signal that the economy is doing well. But even that small amount of bonds hitting the market will cause price fluctuations. Think about a bakery that has extra bread. They have increased supply, and the same demand, so prices drop temporarily, like the stickers you may see at the grocery store reading “Ooops, we baked too much.” In the long run, the bonds are worth the same amount, but the price will temporarily drop because there are more available for purchase.
How do you translate that to your own investments? Generally, you don’t. Figure out what your goals are, and design a plan to get there. Use professional money managers – the folks who are doing nothing with their day but taking advantage of these short-term irrational moves – and stay the course. A well-diversified portfolio that is aligned with your goals is not sexy or exciting, but it gets the job done. If you want sexy and exciting, head over to a la mode Intimates and pick up some new lingerie. If you want to protect your family, send your kids to college, and retire at some point, tune out the noise and take a long-term view.
Your action to take this week is to get a small notebook and, for the next week, write down everything you spend. Food, bills, parking meters, the snack machine at work if you’re back in the office. Every time you pay for something regardless of how you do it – card, cash, electronic bill pay – write it down.
And you can always find more financial information and resources on our website at covingtonalsina.com and on our Facebook page.
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All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.