NEW YORK – WND reported earlier this month that if the Federal Reserve decided to taper its purchase of federal debt by another $10 billon a month at the Federal Open Market Committee meeting, the bond market would experience an increase in yields reflecting rising interest rates and the stock market would take a nosedive.
As anticipated, the FOMC stayed on course, announcing the Federal Reserve in February would purchase $10 billion a month less in federal debt for the second month in a row. The move brings the level of Quantitative Easing under the former Fed chairman from $85 billion a month to $65 billion in February.
On Friday, the Dow Jones Industrial Average closed at 15,698.85, losing 149.76 points. It marked a 5 percent loss for the month in the value of the Dow, making January 2014 the worst start to a year since 2009 and the second worse since 1990.
It was the second worse January in 24 years.
If the Fed continues to reduce QE by $10 billion a month until it no longer buys large amounts of U.S. debt monthly, the stock market likely will experience a major downward correction that will punish retirement savers with IRA and 401(k) investments in stocks.
Time for retirement savers to take stock gains
Whether a person saving for retirement invests in the stock market directly or in the stock market via mutual funds, the risk is the same. When the stock marked corrects downward, the retirement investor most likely will take losses in accumulated retirement savings.
Depending upon the severity of the downward correction, it may take years for the retirement investor to recover the losses, such as that experienced in 2009. IRA and 401(k) investors lost principal from their retirement savings accounts when the Dow fell from a closing high of 14,164.53 on Oct. 9, 2007, to a closing low of 6,547.05 on March 9, 2009, as the housing market bubble burst.
Fidelity Investments estimated, for instance, the average 401(k) fund balances on the approximately 11 million accounts Fidelity manages dropped 31 percent to $47,500 at the end of March 2009, from $69,200 at the end of 2007.
With the Dow going over 16,000 in the extended rally since 2009, most IRA and 401(k) investors have registered substantial gains, but that situation could change for the worse in the next few months.
The solution for cautious retirement investors is simple.
Investors can contact a financial adviser and direct that any mutual fund money in stock market mutual funds be moved to an investment alternative within the same family of funds that invests in bonds or money market funds.
Typically, the move from one investment option to another within a mutual fund family of funds can be made without paying a fee or penalty.
There is no need to close IRAs or mutual funds. Investors just need to be sure none of their IRA or 401(k) retirement funds are invested in the stock market.
With retirement money out of the stock market, the worst outcome is a loss of some additional upward gains if the Obama administration and the Federal Reserve find a way to increase the level of buying U.S. debt to the $85 billion a month that the Fed was “pumping” into the economy while Ben Bernanke was in charge.
For many, the peace of mind retirement investors and savers can get by taking stock market gains now outweighs the constant worry experienced in a market that loses 5 percent in a month.
Watch interest rates carefully
If interest rates begin to rise, especially on the benchmark 10-year Treasury bill, a second trigger could cause a downward stock market adjustment.
WND has reported higher interest rates will increase the federal government’s cost of debt service on the now over $17 trillion in accumulated U.S. national debt.
For instance, if interest rates were to rise, as many economic experts anticipate, such that yields on the three-month treasury rise to approximately 4 percent by 2018 and 10-year Treasuries to approximately 5.2 percent, interest payments on the federal debt will rise to $505 billion in 2018 from the current level of $255 billion in 2013.
With the expectation on Wall Street that interest rates soon will rise, a speech by Federal Reserve Bank of Boston President Eric Rosengren is drawing widespread attention.
Rosengren, who just finished a year’s service on the FOMC, was a vocal supporter of the Fed’s QE policy, designed to keep interest rates at or near zero. He was the sole dissenter in his last vote as a member of the FOMC in December 2013, opposing the decision recommended by outgoing Fed chairman Ben Bernanke to begin reducing its purchases of U.S. government-issued debt.
Worried that QE tapering was almost certain to give momentum to rising interest rates, Rosengren’s carefully worded speech still managed to convey his concern that ending QE too rapidly could cause an interest-rate spike. In a chain reaction, the consequent increase in interest expense could tank the economy.