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Investors Avoiding Both Stocks And Bonds

080519_USEconomy1My Thoughts: Many of us are concerned about our investments. We don’t want our money under the mattress; we don’t want it all in money markets; we know bonds are going to get hammered when the Fed decides to start raising interest rates; and we know that over the past three months, the stock market has gyrated wildly, with a mostly downward trend.

Unfortunately, this background article won’t help you very much. But it’s not too long.

By Conrad de Aenlle on Nov 5, 2015

What do fund flows tell us about investor behavior before, during and after the third-quarter dive in stocks and the direction of markets from here? Even though raw numbers on money moving in and out of funds should be reassuringly concrete, they leave a lot to interpretation.

The trepidation displayed by the stock market may have begun in mid-August and reached a crescendo soon after, but Louise Yamada, a highly regarded technical analyst who heads Louise Yamada Technical Research Advisors, contends that distress had been building throughout the third quarter. In the September edition of her monthly newsletter, Technical Perspectives, she pointed to data from the Investment Company Institute, a fund industry group, showing that owners of stock and bond mutual funds alike made net withdrawals in July and the first three weeks of August.

“Their observation is that usually stock withdrawals move into bond funds,” Yamada wrote, “but withdrawals from both [are] a sign of nervous investors. This pattern has not been seen since the fall of 2008, a statistic worth noting.”

But a lot has changed in the business since then. Mutual funds are no longer the only game in town, or at least the one that the great majority of investors play. Exchange-traded funds get a far bigger piece of the action today than just a few years ago, and Todd Rosenbluth, director of fund research at S&P Capital IQ, noted in a recent report that as money was leaving mutual funds of all sorts in and around the August swoon, it was being soaked up by ETFs.

During the two weeks through Sept. 2, a period that included the worst of the stock market’s decline and a big rebound, about $1.1 billion more was yanked from diversified domestic stock mutual funds than was put in, Rosenbluth said, citing Lipper data.

ETF flows tracked market action more closely. During the first of those two weeks, a net $5 billion came out of diversified stock ETFs, and the following week a net $7.8 billion was added to them. As for bond funds, mutual funds saw net outflows of about $2.5 billion during the two weeks, while ETFs had twice as much in inflows.

There probably wasn’t much overlap between the buyers and sellers of mutual funds and of ETFs during the market upheaval. In a conversation about his report, Rosenbluth said that mom-and-pop investors were probably doing the bulk of mutual fund dealing, while institutions were the main force behind the ETF flows.

The net effect, in his view, is an acceleration of the longstanding trend away from mutual funds and toward ETFs, as the market decline emphasized an edge — namely lower costs and correspondingly higher returns — that ETFs have over mutual funds, just when investors were looking for any edge they could get.

“I think we have seen an ongoing shift to passive products that the correction has amplified,” he said. “People don’t want to pay up to lose money.”

That may explain the preference for ETFs, but a look at fund flows through August and September suggests that the trend that Yamada inferred from mutual-fund flows and found worrisome — the shunning of both stocks and bonds before the plunge — may be lingering. Perhaps more ominous, the tendency exists even when ETFs are added into the mix.

Flows into domestic stock ETFs in September, about $7 billion, were just enough to negate the outflows from stock mutual funds, according to Morningstar, although outflows from stock mutual funds in August were double the flows into ETFs. As for bond portfolios, it was no contest. Over the two months, three times as much money departed mutual funds as entered ETFs.

Morningstar found six months over the last decade when investors had net withdrawals from stock mutual funds and ETFs combined and from bond funds, too, with August being the sixth. Two of the other five, August 2013 and June 2006, coincided with minor blips in long bull markets.

The other three — June 2015, August 2011 and October 2008, the latter period being the one Yamada alluded to — occurred just before or in the middle of corrections or bear markets. Anyone who saw fund investors’ none-of-the-above attitude as a contrarian “buy” signal for stocks turned out to have jumped in too early.

Buyers who jumped into stocks at the start of October enjoyed an excellent month that could be the start of a long rally. But if the history of those three months repeats, it could turn out to be the calm between two storms.

9 Charts Showing Big Global Slowdown Is On Its Way

money mazeMy Comments: There are two messages here. The first is a global recession is most likely about to happen. The second is the published report has 49 pages with dozens of charts. If looking at charts makes you happy, you will be thrilled.

Will Martin Nov. 14, 2015

The Organization for Economic Cooperation and Development released its twice yearly Economic Outlook on Monday, and it makes for pretty gloomy reading. Angel Gurria, the OECD’s secretary general spoke in Paris on Monday morning, and he reflected the OECD’s generally pessimistic tone.
“The slowdown in global trade and the continuing weakness in investment are deeply concerning. Robust trade and investment and stronger global growth should go hand in hand,” said Gurria.

Alongside the Economic Outlook, the OECD releases a huge amount of information, including a boat load of charts and graphs, some of which show just why the organization thinks that the current economic situation is so worrying.

Source article: http://www.businessinsider.com/economic-outlook-2015-key-charts-from-the-oecd-2015-11?op=1

A Reverse Mortgage To Protect Your Retirement Income

home mortgageMy Comments: Confused? Skeptical? A normal response. But as someone with 40 years of experience as a financial planner, a reverse mortgage can be a significant tool to promote financial freedom as we live out our retirement years.

Nov 11, 2015, by Robert Powell

Advisers have long looked down on reverse mortgages: Only the most desperate of Americans — those who failed to save enough for retirement or those who spent unwisely in retirement — would ever need to use such loans.

But a growing body of research is showing that homeowners of all stripes should consider using a reverse mortgage in conjunction with their portfolio-withdrawal strategy. Such loans, where you borrow from the equity in your home, can help you preserve your nest egg, leave a legacy, or both.

The latest research on the subject comes from Wade Pfau, a professor of retirement income at the American College of Financial Services in Bryn Mawr, Penn. In his study, Pfau examined six ways to use a reverse mortgage as part of retirement-income plan and the upshot is that homeowners now have a framework for deciding which strategy might be best for them.

“Strategic use of a reverse mortgage can improve retirement outcomes,” Pfau wrote in his just-published paper, Incorporating Home Equity into a Retirement Income Strategy. “The benefits are nonlinear in nature, as they relate to the synergies created by reducing sequence risk for portfolio withdrawals and to the non-recourse aspects of reverse mortgages that can potentially allow a client to spend more than the value of their home.”

Other researchers, we should note, are also praising the use and value of reverse mortgages, and the need to incorporate housing wealth into a retirement-income plan. Read Robert Merton on the Promise of Reverse Mortgages and the Peril of Target-Date Funds and No Portfolio is an Island.

But before delving further into the strategies examined in Pfau’s study, a bit of background: The financial advice industry is fond of focusing on financial wealth. After all, that’s how most advisers get paid — on assets under management. But the truth of the matter, according to Pfau, is that home equity and Social Security benefits represent, for most Americans, the two biggest assets on the household balance sheet, frequently dwarfing the available amount of financial assets.

“Even for wealthier clients, home equity is still a significant asset which should not automatically be lumped into a limiting category of last resort options once all else has failed,” Pfau wrote. “It is a great shame for the financial planning profession that the conventional wisdom about reverse mortgages continues to remain so negative and to be based on so many misunderstandings about their potential uses.”

Also, be sure to brush up on all things home equity conversion mortgage (HECM) before using one in your retirement-income plan. Thankfully, there are plenty of government websites with plenty of information about HECMs that will give you the working knowledge you need. Those include the Department of Housing and Urban Development’s website, Home Equity Conversion Mortgages for Seniors and the Consumer Financial Protection Bureau’s website, What is a reverse mortgage?.

For now, here’s what you need to know. To qualify for a reverse mortgage:
• You must be at least 62 years old
• Your home must be your primary residence
• You must have paid off some, or all, of your traditional mortgage

In addition, there’s a limit on how much equity you can tap; there are upfront costs to consider; and you’ve got to get a handle on how the loan balance grows and how it gets repaid. And, you ought to know that distributions from a HECM are treated as loan receipt and are not taxable, which could come in handy if you’re trying to manage your income-tax bracket.

The bottom line is this: With a HECM, you get access to a portion of your home equity as cash: either as a line of credit; in monthly payouts, or as a lump sum.

And that, in essence, is what Pfau researched: What happens to your wealth when you use the different reverse mortgage strategies to tap the equity in your home. In his study, he examined six different methods:
• Use home equity first: With this strategy, you’d open a line of credit at the start of retirement, and use this line to pay for all your retirement expenses until the line of credit was fully used up. “This allows more time for the investment portfolio to grow before being used for withdrawals after the line of credit is depleted,” wrote Pfau.
• Use home equity last: Here, you’d open a line a credit at the start of retirement and only use it after your investment portfolio was depleted.
• The Sacks and Sacks Coordination Strategy: With this strategy, you’d open a line of credit at the start of retirement, and use the line of credit, when available, following any years in which the investment portfolio experienced a negative market return, wrote Pfau. “No efforts are made to repay the loan balance until the loan becomes due at the end of retirement,” he wrote.
• The Texas Tech Coordination Strategy: This method is a bit more complicated. With this one, you’d open a line of credit at the start of retirement and then each year you’d analyze whether you can keep withdrawing money from your investment portfolio at the desired rate over a 41-year time horizon. If the remaining portfolio balance is less than 80% of the required wealth you’d tap the line of credit, when possible. And if the portfolio balances is greater than 80%, you’d pay down — provided your portfolio didn’t fall below the 80% threshold — the balance on the reverse mortgage balance. This, Pfau wrote, would provide more growth potential for the line of credit.
• Use tenure payment: Here you’d open a line of credit at the start of retirement and a receive a fixed monthly payment for as long as the borrower is alive and lives in the house. And spending needs over and above that reverse mortgage payment would be covered by the investment portfolio when possible, Pfau wrote.
• Ignore home equity: This strategy makes no use of home equity, and Pfau only examines it to show the probability of a retirement-income plan succeeding when home equity isn’t used.

So what did Pfau find?

“Generally, strategies which spend the home equity more quickly increase the overall risk for the retirement plan,” he wrote. “More upside potential is generated by delaying the need to take distributions from investments, but more downside risk is created because the home equity is used quickly without necessarily being compensated by sufficiently high market returns.”

“Meanwhile,” he wrote, “opening the line of credit and that start of retirement and then delaying its use until the portfolio is depleted creates the most downside protection for the retirement-income plan.”

This strategy, Pfau noted, allows the line of credit to grow longer, perhaps surpassing the home’s value before it is used, which provides a bigger base to continue retirement spending after the portfolio is depleted. Using home equity last does reduce upside potential because when markets are strong the portfolio will grow faster than the loan balance. “Frequently, this line of credit growth opportunity serves a stronger role than the benefits from mitigating sequence risk through the use of coordinated strategies,” he wrote.

See a diagram outlining the strategies Pfau studied.

Nonetheless, use of tenure payments or one of the coordinated strategies can also be justified as providing a middle ground which balances the upside potential of using home equity first and the downside protection of using home equity last, Pfau wrote. “These coordinated strategies can occasionally provide the best outcomes for legacy in some simulated cases when they best balance the tradeoff between using home equity soon to provide relief for the portfolio, and delaying home equity use so the available line of credit is larger,” he said.

But no matter what method you use, do consider the advantages of opening a reverse mortgage line of credit at the earliest possible age. There’s great value, wrote Pfau, in that.

Robert Powell is editor of Retirement Weekly, published by MarketWatch.

Fifth Generation Warfare: Follow the Food!

My Thoughts About This: For several years I followed the writings of Thomas P. M. Barnett. About 3 years ago, he suddenly closed his blog. He posted thousands of ideas and articles about global economics and security issues, most of which made sense. I never forgot one of them where he predicted that by 2045, (no further forward than 1980 is backward) conflict among nations and peoples will be about food.

Keep this in mind as we re-commit boots on the ground in the middle east and how we build and maintain the defense industry going forward over the next decade. In another post he suggests that among the most civilized nations on earth, we are the best prepared to satisfy our own need for food, compared to the rest. And that will influence how our grandchildren and beyond will live and die in the coming years.

By Thomas P. M. Barnett , June 08, 2011

Everybody thinks that the future is going to see fights over energy, when it’s far more likely to be primarily over food. Think about it: The 19th century is the century of chemistry and that gets us chemical weapons in World War I. The 20th century is the century of physics and that gets us nuclear weapons in World War II. But the 21st century? That’s the century of biology, and that gets us biological weaponry and biological terror. My point: obsessing over nuclear terrorism is steering by our rearview mirror.

Which gets me to our Spanish friend over here: an actual E. coli outbreak in Europe, centered largely in Germany, kills upwards of two dozen while sickening hundreds more. The early fingers point at Spanish cucumbers, but that’s looking iffy on investigation. Truth is, we may never know, but once the accusation is levied, Spain’s vegetable and fruit export industry may never be the same, and to me, that’s an interesting pathway for what I expect Fifth-Generation Warfare (which focuses – by some experts’ definition – on the disruption of the enemy’s ability to “observe” in John Boyd’s OODA loop) will be all about in the 21st century: biological terror to create economic dislocation and loss (along with the usual panics).

Same basic dynamic happened to the US beef industry early last decade: In 2003 US exports of beef amounted to about 1.3 million metric tons. Then there was a whiff of mad cow that year. They were real cases, all right, but the cause? One cow imported from Canada was fingered. The result was clear enough, though, as US beef exports plummeted by a million metric tons. The US beef industry has struggled to regain its previous level ever since, as major Asian markets that immediately shut themselves down to US exports have been very reticent to open back up again.

My point: if you’re a terrorist looking to sow fear and confusion, disrupt supply chains and ruin crucial industries, you can’t do much better than to work some biological mischief on food networks. Make that one cow happen from Canada. Make that one batch of messed-up veggies go into Germany – whatever. If you think people are afraid of radiation (dirty nukes, etc.), that’s nothing compared to their fear of tainted food.

The timing on the E. coli outbreak in Europe is perfect: right on the heels of the “periphery” debt crises, you’ve got the same countries (Spain, etc.) squared off against the same “victims” (Germany foots the bailout bill disproportionally and now suffers disproportionally on this tainted food outbreak). Bottom line: you – Mr. Terrorist – have created tons of enmity, economic loss, and discombobulating fear. If I’m al Qaeda, I’m claiming this one on principle.

The average farm-to-fork journey in this world is now about 1,500 miles, and it’s getting longer by the week. Global climate change will make it harder to grow food across a thick band of territory (roughly up to/down to the 35th parallel) centered on the Equator. That’s where most of the population growth and water stress problems will erupt in coming decades, and it’s also where countries all tend to be highly dependent on imported food. See your Arab Spring and realize how much of this unrest is caused by rising food prices and you’ll get the overall picture.

Mark my post: this century is all about biology, rising food demand – and thus dependencies exacerbated by climate change (see the buying-up of arable land in Africa by Arab and Asian nations), and thus biological terror comes to the fore. Forget about energy nets, because they all go far more localized with smart grids, co-located generation/distribution, etc. It’s food that will be the most vulnerable global network in the future.

A Fantasy World?

deathMy Comments: My cousin vowed to stop shouting about the state of political dialog these days; he asked me to do the same, and to some extent, I’ve tried.

There are dynamics at work right now that overwhelm the electorate and the media as we stumble toward the next presidential election in 12 months. But as an economist by training, I cannot ignore the fantasy world that continues to emerge from the Republican hopefulls as they spin their training wheels.

Amanda Marcotte Nov 11, 2015

A little more than halfway through what felt like the millionth Republican primary debate, this time in Wisconsin and run by Fox Business, Rand Paul had a momentary and clearly unwelcome brush with reality. After hours of hearing one candidate after another indulge the childish fantasy that we can cut taxes and balance the budget, apparently only by cutting food stamps, Paul broke every rule in the Republican playbook and pointed out that military spending is a huge sinkhole for taxpayer money.

“How is it conservative to add a trillion dollars in military expenditures?” Paul sniped at Marco Rubio during one particularly heated moment in the debate. “You can not be a conservative if you’re going to keep promoting new programs that you can’t pay for.”

Rubio, facing a clearly unexpected challenge to the widespread Republican notion that you can cut taxes and eliminate the debt without cutting a dime on Republican-cherished budget items like the military, got flustered and tried to deflect with fifth grade debating tactics. “We can’t even have an economy if we’re not safe,” he whined. “There are radical jihadists in the Middle East beheading people and crucifying Christians.” Luckily, we were all spared him whipping out an American flag and a cross and asking us to pray for him, but you could feel it was probably coming if Paul kept pressing his point.

None of this makes Rand Paul a good guy. Paul is just as much a delusional fantasist as the rest of the GOP field. He has to be, to run for President on a dovish platform in front of a Republican crowd that eats it up when, for instance, Jeb Bush suggests that “Islamic terrorism” is the greatest threat facing the country. And he spent of the rest of the debate spinning out pure nonsense, a bunch of meaningless garbage about how he has a 14.5 percent flat tax that is “revenue neutral” and probably wipes your butt and does the dishes for you.

Still, in a debate situation where most candidates were climbing over each other to argue that their tax plan was the flattest, his point about military spending circled slightly closer to reality than most candidates dare go. Now wonder he can’t seem to get any higher than 3 percent in the polls.

One thing seemed certain during this debate: The continued popularity of Donald Trump and Ben Carson clearly sent a signal to the rest of the field that primary voters simply hate reality, particularly when it comes to economics, and will swiftly punish any candidate who feeds them anything but soothing, if ridiculous fantasies.

Republicans haven’t changed their economic views over the decades. They continue to be the party that wants to enrich the wealthy at the expense of everyone else, economic or social consequences be damned. But they’ve all clearly read the various think pieces arguing that Donald Trump is appealing to “white populists”, so the theme of the night was pretending that Republicans are here to protect the working Joe against the decadent elite as well as the vampiric poor.

The attacks on low income people started right off the bat in the main stage debate, with Donald Trump, in response to a question about the minimum wage, busting out the line of the night: “Wages are too high.”

Fox Business moderators only made Trump and Carson—the two candidates that the party elite is eager to push out of the campaign so “real” candidates can move forward—go on the record as opposed to the minimum wage. (Most Americans want a minimum wage hike.) But Rubio pounced on the question anyway, though the moderators graciously declined to ask him about it, spinning out an answer that made it sound like opposing higher wages for working class people will somehow stick it to the educated elite: “For the life of me, I don’t know why we have stigmatized vocational education. Welders make more money than philosophers. We need more welders and less philosophers.”

The audience, stoked by years of right wing media telling them to hate pointy-headed intellectuals, ate it up. But this clearly practiced talking point really crystallized the strategy that nearly every candidate employed on stage, implying that the poor and the wealthy are somehow in cahoots to screw over the middle class. And so the next two and a half hours were spent listening to a bunch of rich Republicans who want to cut taxes for even richer Republicans all pretend that they are fighting for the little guy against those rich bad guys.

In response to a question about income inequality, for instance, Rand Paul sneered, “And I think that we ought to look where income inequality seems to be the worst. It seems to be worst in cities run by Democrats, governors of states run by Democrats and countries currently run by Democrats.” God only knows what countries run by Democrats he’s talking about (two out of three branches of our federal government are controlled by Republicans), but he clearly wants you to believe that, say, New York City has a whole lot of rich people in it and Wichita, Kansas does not because New York City is somehow stealing from the working man to give to the rich. As opposed to the likelier explanation, which is that people who can choose where they want to live gravitate to big, vibrant, and yes, liberal cities like New York.

But this was the theme of the night, Republicans all bashing the rich and the big banks and swiping rhetorical ploys right out of that hated socialist, Bernie Sanders’s playbook. Nearly every candidate not named Rubio or Bush touted that perennial right wing hobbyhorse, the flat tax, and the claim, repeated well past the point of tedium, was that it’s somehow a boon to middle class taxpayers to take away their mortgage interest deductions and child credits so that the wealthy can see their tax rates cut in half or more.

But the contortions the candidates had to twist themselves into got increasingly comical as the night went on, culminating in Rubio trying to pull of one of the biggest howlers of the night: Arguing that the best way to break up big banks so they’re not too big to fail is bank regulation.

“Do you know why the big banks got big? Because big government made them big,” he said. He had some labored explanation claiming that it’s because only big banks can afford the lawyers to deal with regulations, which probably impressed people who don’t like thinking very hard, or much at all. But for the rest of us, the notion that banks in a capitalist system would be so grateful for a low regulatory system that they’d elect to stay small instead of trying to expand their power and profit margins by buying each other up is so dumb that I kind of want to slap myself for even typing that.

The reality is that every single candidate on stage has a tax plan meant to screw over the entire country so that the already wealthy can buy bigger yachts, just as it was under Bush and every Republican before him. Rubio and Bush’s tax plans require cutting so much federal spending it would tank the economy, all so that the Donald Trumps of the world can finally start wiping themselves with gold cloth instead of mere silk sheets. A few dollars thrown to middle class voters in the short term cannot hide the fact that it’s a terrible idea to grind our economy to a halt to make the rich even richer.

The flat taxers are even dumber, which is saying a lot. It is, as it always was, just about giving a bunch of money to the rich by gouging working people.

But such is the power of fantasy in this election cycle. The Republican voters clearly want to believe that they you’re sticking it to the rich by lowering their taxes and somehow that you can afford all of this, while also balancing the budget, while seriously reducing the government’s ability to earn income. Oh yeah, and while we’re in fantasy land, Ted Cruz even went so far as to claim he could abolish the IRS. Maybe we can do this without collecting any income taxes at all!

At this point, there’s no reason for Republicans not to nominate Donald Trump. You almost have to feel sorry for the guy. Everyone calls him out for being full of shit, but, sit through enough Republican debates and you quickly realize he is no more so than the rest of this sorry field.

Very Strong Jobs Numbers Underpinned By Wages

Bruegel-village-sceneMy Comments: Politicians of all stripes consider employment numbers relevant, and well they should. Right now we have the lowest unemployment numbers in this country that we’ve seen for a long time. And it’s all because of that idiot in the White House.

This came from a group called Bespoke Investment Group, a name I am not familiar with. Also, there are several charts that I’ve chosen not to replicate here. But if you want to see them, here’s the URL where I found this article: http://seekingalpha.com/article/3662136-very-strong-jobs-numbers-underpinned-by-wages?ifp=0

Nov. 8, 2015

Friday’s Employment Situation Report delivered an extremely strong Nonfarm Payrolls print (+271,000 vs +185,000 expected and 142,000 previous, revised down to +135,000). While that headline number is extremely strong, the “guts” of the report were even stronger. Unemployment fell to 5.0%, the U6 measure of broader unemployment came in at 9.8% versus 9.9% expected and 10.0% previous, and the labor force participation rate held steady.

But the real story, in our view, was wages, which were boosted in part by a recovery from an extremely weak reading in September. Even still, the gains were nothing short of breathtaking. Below we show MoM annualized wage changes, along with the level for each industry.

As shown, there were broad-based wage gains across the economy in October, with Construction leading the way, up 18.2% MoM annualized. Other “low pre-requisite” industries also had steady gains, with Leisure and Hospitality printing a steady +4.82% MoM annualized level. The strength wasn’t universal (notable weakness in Manufacturing, Retail Trade, and Other Services) but overall this was a solid wage print. Looking at Construction, below we show the MoM annualized Construction Production and Nonsupervisory wage series, MoM annualized. This was the second-best print for that series in over 20 years, eclipsing one of the worst prints in years last month.

To get an idea of the broader trend in average hourly earnings, we show the YoY change in AHE for the last 10 years. Total private wages are +2.48%, while production and nonsupervisory earnings are +2.22%. The former is the best print of the recovery and a notable move above the range that had prevailed since the recovery began. Production and Nonsupervisory wages are still underperforming, but the spread between the two YoY series moved from 0.32% in July to 0.26% this month, notable progress.

Bad News Is Good News, Once Again

My Comments: The markets seem as though they are being run by the Kardashians; drama, reversals, intrigue, chaos, take your pick. We watch because we have to, given that for many of us, our future financial freedom is in the balance.

November 06, 2015 by Scott Minerd

The mantra now is that bad news may turn out to be good news for the markets. Over the past couple of weeks, policymakers around the world have indicated that should any kind of negative event roil the markets, central bankers are prepared to take some form of action or, in the case of the Federal Reserve, non-action. In Europe, European Central Bank President Mario Draghi hinted strongly that additional monetary policy easing is on the way as inflation remains well below the ECB’s 2 percent target and the growth outlook remains uncertain. In Japan, the central bank revised down inflation and growth forecasts, and signaled a willingness to expand its quantitative easing program further. In the United States, the Federal Reserve is keen to begin raising rates in December, but there is no assurance it will because the decision will be data dependent.

The Federal Open Market Committee’s resolution to remain on hold at its September meeting due to volatility emanating from China confirmed that global macroeconomic issues and market volatility can play a significant role in determining when policy tightening finally commences. All this goes to say that any bad news or setback in the global economy is likely to be met with a policy decision that will be supportive for credit and equity markets; therefore, at this point, I see limited downside for risk assets between now and year end. Put another way, a December Fed hike should be taken as a sign that the Fed is sufficiently comfortable with the strength of the economy and the near-term outlook, which should be good news for investors. Given the October employment report, December liftoff has become a virtual certainty unless there is some catastrophic event between now and then.

As for the fundamentals of the economy, in the United States, the data look encouraging. Underlying real GDP growth was actually stronger than the 1.5 percent preliminary estimate for the third quarter would suggest. This is because the U.S. was due for an inventory correction, and declining inventory investment shaved 1.4 percentage points off the headline growth figure. Consumer spending, which accounts for about two-thirds of U.S. demand, rose by 3.2 percent, indicating that consumer spending is strong heading into the holiday shopping season. Robust equity returns in October—the largest monthly gains in four years—also bode well for Christmas sales.

It would be premature to open the champagne just yet. Slowing emerging market growth continues to weigh upon economic growth around the world, particularly in Europe. Meanwhile, the New York Stock Exchange Accumulated Advance/Decline Line, or market breadth, has failed to make new highs, or at least return to old highs, which would confirm sustainability of the current equity market rally. This is okay for the moment, because equities have yet to quite reach their old highs either—the market remains a stone’s throw away from its peak in May—but breadth leads the market, and over the coming months investors should keep a close eye on it.

While it is always prudent to be mindful of potential headwinds, the bottom line is that policymakers have made it very clear that their tolerance for sharp declines in risk assets is virtually nonexistent. They are prepared to take action (or inaction) as necessary.

Against this backdrop, I do not see significant risk to my forecast that the S&P could climb to a high of 2,175 in the next few months. Given policymaker commitment to support risk assets, it is likely that the rebound that has been underway in credit and equity prices will continue to endure over the coming months, regardless of bad news or concerns about slowing global growth.