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Daniel Nestlerode: Post-Election Investing

by on November 18, 2012 8:15 AM

We are finally through with all the campaigning and related advertising about this and that and all the dire things that will happen when whomever is elected. We are getting four more years of the current administration and the Democrat Senate (Harry, no budget, Reid) and the same tax increase blocking Republican (John Boehner) House of Representatives.

So what was settled with the election? In a word, nothing. All the unresolved issues that were debated and talked about by voters, pundits, news anchors, politicians, economists and business leaders are still staring us in the face.

So where are we now? Researchers at the ECRI (Economic Cycle Research Institute) indicated in September that the U.S. economy had already slid back into a recession. This is in spite of the fact that the third quarter GDP grew at 2 percent (that number will be revised a couple more times until we get to the final number). In October the Federal Reserve under chairman Ben Bernanke embarked on Quantitative Easing III or QE III or more sarcastically “QEternity”.

In my 47 years as an investment adviser, I have never seen such an extended period of stimulus by the Federal Reserve. Historically, such programs were for relatively short periods; designed to get the growth of the economy back up to speed. This time, it hasn’t worked. What has happened is that the investment returns required by retired investors for retirement expenses have been nearly non- existent, forcing investors to riskier investments to provide this needed income.

In addition, asset prices have climbed, driven by cheaper money making the stock market perform relatively well despite the moribund economy. Now Bernanke tells us he will keep interest rates low for as long as it takes unemployment to be substantially lower than the present numbers, around 8 percent as currently calculated. The real unadjusted numbers are more like 16 percent if you use the formulas from the pre-Clinton years. In my opinion, Bernanke’s notions are disingenuous at best as there is very little more the Federal Reserve can do to address unemployment. Monetary policy is the wrong tool to use to impact unemployment, no matter how hard you swing the hammer.

In addition to the Fed’s actions, the White House and Congress are now beginning to address the supposed Fiscal Cliff, a combination of tax increases and spending cuts that will start Jan. 1 if nothing is done. We have essentially backed ourselves into the corner and must do something to fix continuing mammoth federal budget deficits that have accompanied the Obama Administration. Spending is currently running more than a trillion dollars over tax receipts annually with little hope for any improvement in the future, near term or long term, unless we tax more or spend less or do both.

Of course, all this conversation about economic issues might just be rather a distraction from the increased warfare in the Middle East, from Libya, Syria, Iran and Israel. We have a lot at stake in keeping that region in a relatively peaceful mode. Unfortunately, our efforts seem to be failing as each side is stepping up their terrorist and military activities. This could be a serious issue for us budget-wise at the federal level, in addition to QE III and the Fiscal Cliff.

All of this conversation is germane to the question, where do I invest my money now for a relatively low risk and reasonable rate of return? I thought as I got older that this question would get easier as I accumulated more experience. Foolish me. The investment question is now more difficult than in any of my 47 years of directing client money to what I thought was the right place at the time.

I note that the risk of sudden sharp losses seems to be higher now than at any time except the 1987 stock market crash, the tech bubble implosion around the turn of the century and the financial implosion of 2007-08. The markets never fully recovered from the 2000 or 2007 highs and now seem to be poised to move lower despite the actions of the Federal Reserve.

Long ago some smart advisers noted that it was foolish to fight the Fed, meaning that you should invest depending on whether the Federal Reserve was stimulating the economy (buying normally - like this time) or selling if the Fed was raising interest rates and contracting the money supply to slow the economy. That notion might just be obsolete in today’s circumstances. Like I said, it isn’t easy knowing where to invest safely.

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Dan Nestlerode is the Director of Research and Portfolio Management at Nestlerode & Loy Investment Advisors in State College. A graduate of Penn State University, Nestlerode has been an investment advisor since 1965. He can be reached at danielj@nestlerode.com.
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