When the Federal Reserve meets this coming Wednesday at its next regularly scheduled open market committee meeting, it will be only the second time in 19 meetings that the Fed decides not to raise rates. The Discount Rate will remain unchanged at 5.25%. The Fed’s next move is no move on rates.
What does this mean for investors like you and me?
The next step, I believe, will be for the Fed to change its official stance from neutral (that’s when rates don’t rise) to one of stimulus (that’s when rates go down to stimulate the economy). When rates fall, three investments usually go up: bonds, stocks, and real estate.
Of the three, I like bonds the best. Stocks, in my opinion, are fully valued. Yes, I believe the Dow Jones Industrial Average can rally to a new record high, surpassing its early 2000 high, but I really don’t see stocks going up much further from there. Consumer spending is being reigned in and that’s bad news for many companies that sell to American consumers.
As for real estate, the typical consumer is now clued in on the soft market. While the Fed may lower rates in its effort to soften the blow in the residential property market in the U.S., the party’s officially over in the property market.
Hence, this time around, good quality bonds are the safest place to be in an environment of falling rates. And if rates fall sharply over the next couple of years, you can bet bonds will rise sharply in price.
NEWSFLASH–Only 1,512 homes sold in the previously hot Date County, Florida market in July 2006 compared to 2,423 homes sold in July 2005. Worse news for homeowners and investors in this Miami area property market: The number of listings in July 2006 jumped to 27,563 homes for sale compared to 9,453 homes for sale in July 2005. That a whopping 192% jump in houses for sale! Who’s still calling this a soft landing?