Fed Cuts Rate to 1% - So What Now For Your Investments?

Yesterday the Fed's FOMC cut US rates by half a percent to 1%. As predicted, the dollar has weakened, losing about 10% in two days. The corporate media loves to talk up stocks (especially their own) but the effervescence went flat pretty quickly, with the Dow index doing its now legendary nose-dive in the last 10 minutes. The Dow plunged some 400 points in those closing minutes. There's confidence for you!

The resistance level it is trying to break through is around 9350, which was last week's high. It did peer above it yesterday but then suffered altitude sickness and collapsed. The level above that is around 9800, but if it fails at 9500 we continue to be in a downward trend. Nobody knows what will happen and anybody that says they do is just guessing. As I've said before, shouting "bottom!" every time we hit a new low will be correct one day, we just don't know when.

However, US interest rates cannot go much lower. They could fall to Japanese levels but that is absolutely no guarantee that it will help stock prices recover. It is a sobering thought that the Nikkei peaked at about 39,000 in 1989 - it is now, 20 years later, at about 9,000. It has lost some 75% in 20 years. Beware of the broker mantra that stocks always outperform bonds.

Treasury 10-year bonds are still yielding 3.8% in spite of the discount rate dropping to 1%. In 10 years, compounded, that comes to a 45% profit - after 20 years the profit would be 110%. Many people have now been through two serious bear markets. The promise of retirement wealth may ring hollow to many of them. All pundits repeat their sacred mantra, mainly because they cannot breathe without their broker fees, but investing in Japan may be a warning that things do not always get better. I think many individuals need to carefully rethink their retirement investments. Holding a majority in sovereign bonds and having the stock markets and commodities as the froth on top would have been the wisest thing to do 20 years ago. It may well be the wisest thing to do for the next 20 years.


This article also appears at Xomba