EC When Banks Get Beat, Who Wins?

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Here in 2018, though, the Fed Funds rate is not a token 0.25%. It is 2%-2.25%, and will likely be 2.25%-2.5% after the Fed meets on December 18. Even if the current group of committee members agrees to “pause” on the hiking campaign, and even if they slowed the pace of the quantitative tightening that is responsible for $50 billion monthly reductions in the Fed balance sheet, the cost of capital is much higher today than it was in 2016.

There’s another issue. Back in the 2016 correction, 10-year Treasury yields bottomed out near 1.4%. They were only about 1.7% going into the election later on in November. One supposedly had to own stocks over bonds because bond yields were so darn unappealing. Remember the TINA acronym? “There is no alternative?”

Here in the 2018 correction, a 10-year Treasury peaked near the 3.25% level. Yet even today’s 2.88% 10-year note is far more competitive with stocks than when those notes yielded 1.4% or 1.7%.

I cannot tell you whether or not another financial crisis is around the corner. I can tell you that when banks get beat, overly aggressive risk-taking in broader stock indexes is ill-advised.

After all, both Janet Yellen and current Fed chair Jerome Powell see the potential for toxic loans to undermine the global system. If contagion should spread, you might find yourself benefiting from cash equivalents, high-quality (AA and A) corporate bonds as well as stocks of companies with fortress-like balance sheets.

I might opt for individual A-rated corporate debt. Apple comes to mind.

That said, if the Fed is actually close to the end in its rate-raising activity, iShares Aaa-A Rated Corporate Bond ETF (QLTA) could benefit immensely. The 30-day SEC yield of 3.9% isn’t too shabby. Moreover, if the Fed shifts back to easing in 2019 or 2020, one might anticipate price gains as well.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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Gary Anderson 1 year ago Contributor's comment

Everybody says real estate is no longer important. So, those must be the same people who think banks are no longer important. But with credit growth declining across the board, you wonder what will drive the economy going forward.

Sandra Sinclaire 11 months ago Member's comment

Lots to ponder!