Bill Hall: Many investors expect interest rates (and yields) to keep rising, and it’s hard to argue with them.
But there’s an alternative school, of which I’m part, that says U.S. investors may see lower rates in the offing. That’s why I recommend that, if you still own bond funds, hold on to them.
Last week I wrote in my column that slow inflation and sluggish economic growth will put a cap on rates. This week I’ll discuss why three other factors suggest we’ll see lower rates for at least six months and probably 18 months.
Consumers haven’t healed from the Great Recession. Most U.S. families’ incomes haven’t risen, and jobs have been hard to come by. That means, based on the standard of living in the U.S. (as measured by real median household income), the recent recovery has entirely bypassed the consumer sector.
While it’s normal for the standard of living to contract in recessions, this is the first time — deep into an expansion — that it has continued to erode. As the chart below shows, the current standard of living is unchanged from 1995.
In spite of some seemingly marginal job gains in the first half of 2013, a closer examination of the numbers reveals that conditions have actually gotten worse. That’s because about three-quarters of the increase in jobs so far this year have been in four of the lowest-paying industries: Retail; temporary-help services; hospitality and leisure; and nursing- and residential-care facilities.
In fact, Lacy Hunt, the chief economist at investment-management firm Hoisington Investment Management, reports that during the first half of 2013, part-time jobs increased at an average rate of 93,000 per month, while full-time jobs averaged increases of only 22,000 per month. That puts full-time employment as a percentage of the adult population near its lowest point in three decades: 47 percent.
The shift to part-time employment likely reflects business’ efforts to reduce the increase in health-care costs associated with full-time employment under the Affordable Care Act.
Moreover, with individual income taxes on the rise, conditions will continue to deteriorate. That’s because when taxes are increased (as has recently occurred), the initial response of households is to lower their savings rate rather than to immediately reduce spending.
This explains the sharp drop in the personal savings rate to 2.7 percent in the first five months of this year to a level at or below the entry points of all the economic contractions since 1929. The 2013 slump in the savings rate is a painful indicator of the real economic adjustments that lie ahead, and also an additional restraint on economic growth.
There is a two- or three-quarter lag in consumer-spending reductions after a tax increase is put in place, several academic studies show. That’s why I expect the main drag on growth to occur in the third and fourth quarters of this year, with the negative trend continuing for another two years.(...)Click here to continue reading the original ETFDailyNews.com article: Why You Shouldn’t Abandon Your Bond Funds YetYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
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