NEW YORK – All it took to trigger a global stock sell-off was a comment Federal Reserve chairman Ben Bernanke made Wednesday suggesting the Fed would take a look at backing off quantitative easing at one of its “next few meetings.”
The near-panic selling set off in global markets by a mere suggestion the Fed might quit pumping hundreds of billions of dollars of liquidity into world financial markets should be a warning sign to retirement investors with IRAs, 401(k)s or other funds invested in stocks.
Is now the time for retirement investors to pull out of stock market investments in anticipation of what increasingly appears to be a massive downward stock market adjustment should the Fed significantly ease off buying U.S. government debt?
This may be a difficult decision for many retirement investors to make, especially after the historic gains registered over the past two years in most IRA and 401(k) funds invested in stocks and bonds.
Should the Fed end or significantly reduce QE3, as is widely anticipated for no later than March 2014, interest rates can be expected to rise in the United States, with the likely consequence of setting off a round of losses not only in the U.S. stock market, but also in the U.S. bond market.
Savers and investors in or approaching their retirement years are advised to be cautious, given the limited time remaining in typical life cycle expectations in which to recover losses suffered in investment markets.
Rough waters for retirement savings
For cautious retirement investors who cannot afford to take a loss, the question is not necessarily whether the 15,000 mark is the high point of the Dow Jones Industrial Average in the current investment cycle, but whether QE 3 must come to an end, perhaps sooner rather than later.
The safest calculation of cautious retirement investors may be to examine the possibility the current stock market historic highs have been fueled predominately by the massive liquidity pumped into world markets by the Fed since 2009, as opposed to traditional bull markets in which stock market rises have been fueled by gains in economic fundamentals as reflected in strong corporate earnings derived from genuinely strong market demand.
When the Fed pulls out of QE3, panic selling will benefit only those who get out first, most likely the institutional fund managers and professional financial analysts, not typically the individual retirement funds investor.
A long-standing rule of investing is that those who stay in markets to achieve the last possible gains are the ones who may risk taking substantial losses. Individual retirement savings investors holding IRAs, 401(k) plans and other tax-favored retirement instruments, including variable annuities, may be well advised to pull money out of stock and bond investments at this time.
Market gains that individual retirement investors take at this time can be placed in bank CDs or money market funds to preserve gains and wait for a more stable investment environment in which to go back into stock and bond markets.
This is a time when individual retirement savers should seek the advice and counsel of appropriately licensed professional investment advisors with an established track record of success, even in volatile market environments.
Global stock markets plunge
Global markets took Bernanke’s seemingly innocuous comments as a signal the Fed was serious about ending its third round of buying billions of dollars monthly of U.S. government debt, including Treasury bonds and housing bonds. The program that is currently designated Quantitative Easing 3, or QE 3, indicating the current debt buying round is the third such effort the Fed has taken since the DJIA hit a new 12-year low of 6,547.05 on March 9, 2009.
The most severe stock market decline occurred in Japan as a “flash crash” caused the Nikkei index to plunge 7.3 percent.
Overnight in the U.S., stock markets in Frankfurt, London, Paris and Milan slumped more than 2 percent.
On the market open in the U.S., the DJIA plunged 127 points, before bullish analysts, including some government officials representing the Obama administration, quietly advised institutional investors the Fed had no immediate plans of ending or significantly backing off QE3.
Obama balloons Fed’s holdings of debt
Under Barack Obama, the Federal Reserve has become the world’s largest holder of U.S. government debt.
In January 2013, the Federal Reserve revealed that its holdings of U.S. government debt had increased to an all-time record high of nearly $1.7 trillion.
By comparison, when Obama was inaugurated in 2009, the Fed owned a mere $475 billion in U.S. government debt. Since then, the Fed’s holdings of U.S. government debt have increased by 257 percent.
The Fed’s use of quantitative easing demonstrates it is out of monetary tools, having keep interest rates at or near zero in an attempt to stimulate economic growth for nearly three years.
Market expectations until recently have been that the Fed will attempt to stop before $2 trillion of Treasury debt has been purchased and added to the Fed’s balance sheet.
The U.S. Treasury reports that as of this month, total U.S. public debt outstanding is approximately $16.7 trillion; by comparison, total U.S. public debt outstanding at the end of the presidency of George W. Bush was approximately $10 trillion.
According to official estimates by the federal Bureau of Economic Analysis, on Sept. 11, 2012, total U.S. debt exceeded U.S. gross domestic product, or GDP, for the first time since the end of World War II, with U.S. GDP 2012 estimated at $15.6061 trillion, about $440.5 billion less than the $16.0466 in debt that the federal government had accumulated as of that day.
Coincidentally, Sept. 11, 2012, was the 11th anniversary of the 9/11 terrorist attacks on the World Trade Center and the Pentagon, as well as the day on the U.S. facility in Benghazi, Libya, was attacked by terrorists, resulting in the murder of U.S. Ambassador Christopher Stevens and three other Americans.
The use of quantitative easing as a tool of the Fed to stimulate the economy and reduce unemployment is a novel and untested approach to monetary policy.
QE3 was announced Sept. 13, 2012, in an 11-to-1 vote of the Federal Reserve Board. The Fed decided to launch a $40 billion per month, open-ended purchasing of U.S. Treasury debt instruments and U.S. agency-generated mortgage-backed securities.
On Dec. 12, 2012, the Fed decided to increase the open-ended purchasing of U.S. debt from $40 billion per month to the current level of $85 billion a month.