Learn What To Expect In The Financial Markets In 2014
Since the major market downturn in 2008 the financial markets have made a steady climb. 2013 in particular was a good year for the market whether large-cap—small cap—or mid cap stocks.
Major market indicators for large-cap stocks (which represent about 75% of the market—S&P 500, Dow Jones Industrial etc.) was at a five year high and many large cap funds showed returns of over 25% in 2013. Small and mid-cap stocks also showed returns of 25% or more with many funds. Many Mutual Funds had returns over 25% as well!
In short—2013 was a banner year for the stock market.
With steady returns in 2013 (roughly 30% or so) the S&P 500 showed an upward tick over the past 10 years with a 7.4% annual return. Mid-caps (S&P Mid-cap 400) 10.4% return and the small-cap Russell 2000 index was up 9.4% annually over the same period.
Not bad considering the dismal year of 2008 when many stocks fell at an astronomical level.
2013 was a good year for the stock market as actively managed funds as well as exchange traded funds did quite well. Many had returns over 30%—and those with low expenses (under .50) were real winners for investors in 2013.
In the bond market "the Fed" has continued its practice of purchasing bonds on a monthly basis by purchasing billions upon billions of dollars of bonds on a monthly basis.
However, with the declining jobless rate—they are intervening at a slower rate than in past years and that appears to be the approach of the Fed at this time—and in the immediate future.
The 10 year benchmark Treasury bond now yields more than 3%—the highest since the middle of 2011.
If that upward trend continues bonds may become more attractive to many investors as many believe the huge stock market returns in 2013 will be hard to duplicate in 2014—therefore, an increase in treasury bond yields may lead many who invest in stocks to prefer bonds.
Mortgage rates which are already at 4.50% in some areas (February 2014) are expected to rise another percentage to 5.5% or so in 2014 in line with the expected movement of Treasury bonds (Treasury bonds are expected to rise from 3% to possibly 4% in 2014).
As an active real estate broker—I do not recall the interest rate being at 5.5% or higher since shortly after the financial market collapse in 2008. Inflation is expected to be fairly stable in 2014 with only modest increases expected and "the Fed" is looking forward to an unemployment rate of 6.5%.
Another area of concern for many consumers are the dismal returns that they receive from their savings accounts—whether it be a regular savings account, a money market account, a money market mutual fund or bank CD's.
And with emergency funds invested heavily in savings account, money market accounts, money market mutual funds and bank CD's—most emergency fund balances have been stagnant (returns are very low at this time).
The returns have been dismal over the past 5 years or so and look for that trend to continue in 2014.
It is important that you realize that savings rates are often tied to the federal funds rate (the rate at which
banks borrow reserves from each other) which has been at a disappointing .25% ("the Feds" use of open market operations affect this rate and include the buying of bonds and other open market maneuvers—mentioned below)—since 2008.
History & Purpose of "the Fed"
To give this discussion some context—it is important that you realize how "the Fed" was created and know its main or stated purpose.
The Federal Reserve System is often referred to as the Federal Reserve or simply "the Fed." It is the central bank of the United States.
It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.
The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law.
The Federal Reserve's responsibilities fall into four broad areas:
The Three Main Ways That The Fed Influences Monetary Policy
1) Open-Market Operations - The Fed constantly buys and sells U.S. government securities in the financial markets, which in turn influences the level of reserves in the banking system. Open market operations are the most frequently employed tool of monetary policy.
2) Setting the Discount Rate - This is the interest rate that banks pay on short-term loans from a Federal Reserve Bank. The discount rate is usually lower than the federal funds rate, although they are closely related.
3) Setting Reserve Requirements - This is the amount of physical funds that depository institutions are required to hold in reserve against deposits in bank accounts. It determines how much money banks can create through loans and investments. Set by the Board of Governors, the reserve requirement is usually around 10%.
The Federal Funds Rate
The use of open-market operations is the most important tool that is used to manipulate monetary policy.
The Fed's goal in trading the securities is to affect the Federal Funds Rate—the interest rate at which banks borrow reserves from each other and is usually "higher than" the Discount Rate (the interest rate that banks pay on short-term loans from a Federal Reserve Bank).
The Federal Open Market Committee (FOMC) sets a target for the Federal Funds Rate, but not the actual rate itself (because it is determined by the open market).
This is what news reports
are referring to when they talk about the Fed lowering or raising interest
rates that you may often hear or read about.
Now that you have some insight on what the markets currently look like and you have an idea of where they are possibly headed in 2014—be sure to go to our investment page and other pages on this site so that you can get added insight on how to invest in a manner that will work for you and your family—in good and bad times!