Unemployment, Fed Bond Buying and Investing in Stocks

bondsThey are close first cousins although it doesn’t seem obvious at first.  The stock market should go down when the economy is doing poorly and the companies are reporting poor results.  Right? Wrong!  Stock prices respond to many seemingly unrelated things such as Fed bond buying.  The Fed is buying $85B of bonds per month to keep borrowing costs low to stimulate the economy – so called QE.  When are they going to stop?  Well, when unemployment dips or inflation rises.  Inflation has been below 2% and we added an anemic 169,000 jobs last month, below the minimum threshold of 200,000 that the economists want.  Also, more people have stopped looking for work so the drop in unemployment to 7.3% is not meaningful.

Although all of this is bad news, it is actually good for the stock market which falls when bond yields rise, making bonds more attractive.  So every time the traders think that the Fed might be ratcheting down bond buying, the market dips.

It’s Not Bad News for Everyone, Though

Now imagine that you are an every day investor buying REITs for fixed income dividends.  These are the first stocks that get hammered in this scenario, although the underlying real estate hasn’t changed in value and the REIT isn’t being overly incompetent in running its business.  Things are really stacked against the regular investor trying to score a return in the stock market.  No surprise that many retail investors are staying away from the market.  It’s a black box dancing  a complex jig.  Not something the ordinary mortal can follow.

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