MONEY Investing

Why I Won’t Own Bond Funds in My Retirement Portfolio

Trays of eggs
James Jackson—Alamy

Owning a mix of stocks and bonds is supposed to help protect your portfolio from losses. But bonds aren't the safe asset they once were.

When stocks took a tumble last week, financial pundits were quick to call it a “potent reminder” to investors of the importance of having some bonds in your portfolio for their perceived safety and yield. The classic mix is supposed to contain 60% stocks and 40% bonds, with bonds supposedly cushioning the risk of equities. In the eyes of most investment experts, I would be considered foolish to be 100% in stocks, as I have been ever since I started investing.

But I’m not sure what bonds they’re talking about. Yes, last week the yield on a 10-year U.S. Treasury note surprised everyone by falling sharply to 1.85%, as bond prices soared—when bond prices rise, bond yields fall, and vice versa. Treasury yields edged back up to 2% the next day, as stocks rebounded. Wall Street experts are still trying to determine the reasons behind the 10-year Treasury note’s plunge, which stunned investors and traders.

But that was a one-day event. When you look at the decline in bond yields over the last three decades, I don’t understand how it is mathematically possible for Treasuries—known as the safest bond possible—to protect a stock portfolio against major shocks over the next 20 years.

No question, falling interest rates have been a boon to fixed-income investors over the last three decades. The yield on a 10-year bond has fallen from 14% in 1984 to 8% in 1994 to 4% in 2004 to about 2% today. The decline hasn’t been non-stop—bonds have rallied along the way—but the overall downward trend has most certainly pushed up fixed-income returns. As a result, bond funds have both made money and helped lower risk in a portfolio. This chart created by Vanguard, based on market data between 1926 and 2011, shows the impact of adding bonds to dampen volatility (as measured by standard deviation), while not drastically reducing returns.

Screen Shot 2014-10-20 at 10.04.52 AM

But those conditions, and that steady decline in rates, no longer exist. Today we have an environment where rates have very little room to fall and at some point will go up (we just don’t know when). Once rates finally rise, bond prices will fall, which means investors will lose money. So when someone recommends diversifying one’s portfolio with bonds these days, I wonder: is there some kind of bond that’s immune to interest rate rises that I don’t know about?

Junk, or high-yield, bonds certainly don’t fit the bill as they are also vulnerable to rate hikes. Moreover, there have been warnings that the accumulation of high-risk corporate and emerging markets bonds by mutual fund companies such as Pimco and Franklin Templeton could create a liquidity crisis in the future. Investors have been pouring money into these funds, but shocks could turn into even larger debacles when investors look to liquidate and the large amounts held by fund companies become hard to sell.

Short-duration bond mutual funds might be less affected by rising interest rates. Fidelity has a whole suite of such funds, which the fund group says “can help investors in a low and/or rising rate period.”

There are also mutual funds that “ladder” bonds with staggered durations so that a portion of the portfolio will mature every year. The goal of these laddered bond funds is also to achieve a return with less risk over all interest rate cycles.

The problem for investors saving for retirement is that the returns on such funds are so low that it’s hard to justify allocating anything to them other than savings you will need in three to five years.

I won’t be retiring for another several decades, so at this point, a market crash isn’t really my greatest risk. My greatest risk is not growing my retirement account as much as humanly possible over the next ten to 15 years. To meet that goal, I think I should stick with equities and use any future crashes as buying opportunities. I’m not 100% comfortable with that decision, but I don’t feel I have much choice. I would love to find a bond fund that could be both a safe haven and could provide steady returns, but I just don’t think that exists anymore.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

More on investing:

Should I invest in bonds or bond mutual funds?

What is the right mix of stocks and bonds for me?

How often should I check my retirement investments?

MONEY stocks

3 Things to Know About IBM’s Sinking Stock

141020_INV_IBM
Niall Carson—PA Wire/Press Association Images

IBM's shares plunged 7% Monday after a disappointing earnings report. Can tech's ultimate survivor transform itself one more time?

International Business Machines INTERNATIONAL BUSINESS MACHINES CORP. IBM -7.1134% has long enjoyed a unique status on Wall Street — a tech growth powerhouse that investors also see as a reliable blue chip, with steady profit growth and a hefty dividend. But with the rise of new technologies like cloud computing, Big Blue has struggled to maintain that balancing act.

Now investor confidence has suffered a big blow.

On Monday the company announced the results of a pretty lousy quarter. IBM’s third-quarter operating profit was down by nearly one fifth, and the company failed to generate year-over-year revenue growth for the 10th consecutive quarter.

Big Blue also revealed plans to sell-off its struggling semiconductor business, a move that involves taking $4.7 pre-tax billion charge against IBM’s bottom line. Actually, it is paying another company to take this unit off its hand.

While CEO Virginia Rometty acknowledged she was “disappointed” with IBM’s recent performance, she’s also pledged to turn the company around, led in part by IBM’s own foray into the cloud.

Now, you don’t get to be a 103-year-old tech company without learning to adapt. That’s what IBM famously did in the ’90s, when the computer giant started to shift away from profitable PC hardware in favor of consulting and service contracts for businesses.

But Monday’s dismal earnings show just how hard repeating that trick could turn out to be.

Here’s what else you need to know about the stock:

1) You can’t really call IBM a growth company anymore since its sales aren’t rising.

When it comes to revenues, IBM ranks behind only Apple APPLE INC. AAPL 2.1399% and Hewlett-Packard HEWLETT-PACKARD CO. HPQ -0.9953% among U.S. tech companies. On a quarterly basis, though, sales have actually shrunk for 10 periods in a row, including a 4% slide in the third quarter. The big culprit is cloud computing, in which businesses can access computing services remotely via the Internet.

Since the 1990s, IBM’s model has been premised on selling powerful, expensive computers to large businesses, then earning added profits on contracts to help firms run those machines. But the cloud lets companies rent, not buy, this computing power. “You only pay for what you use,” says Janney Montgomery Scott analyst Joseph Foresi. The result: IBM’s hardware revenues sank 15% last quarter.

2) IBM is racing to be a leader in cloud computing, but with mixed results.

The company has identified four alternative areas of growth. One is the cloud, the very technology eating into IBM’s hardware sales. Big Blue has spent more than $7 billion on cloud-related acquisitions. It’s also going after mobile, IT security, and big data, the analysis of information sets that are too large for traditional computers. An example of that is Watson. IBM’s artificial-intelligence project, which won Jeopardy! in 2011, is being marketed to businesses in finance and health care.

These initiatives have promise, but IBM’s size is a curse. For instance, the company’s cloud revenues jumped 69% to $4.4 billion last year, but with nearly $100 billion in overall sales, “it’s hard to move the needle,” says S&P Capital IQ analyst Scott Kessler.

3) The stock is now much cheaper than its tech peers, but it may deserve to be.

Investors willing to wait and see if these moves will transform IBM may take comfort in the fact that the stock looks cheap. What’s more, the shares yield 2.4%, vs. 2% for the broad market. This could make the company look like a good value.

But investors should tread carefully, says Ivan Feinseth, chief investment officer at Tigress Financial Partners. He notes IBM has spent $90 billion on stock buybacks in the past decade, which has kept the P/E low by increasing earnings per share. Yet none of that money was invested for growth, as evidenced by IBM’s sluggish annual growth rate. It is hard to imagine IBM outmuscling Amazon AMAZON.COM INC. AMZN 0.8464% , Cisco CISCO SYSTEMS INC. CSCO -1.3763% , Microsoft MICROSOFT CORP. MSFT 1.0314% , HP HEWLETT-PACKARD CO. HPQ -0.9953% , and Google GOOGLE INC. GOOG 1.8917% in the cloud — and there are better values in tech.

MONEY stocks

Could Another Sell-Off Be Lurking This Week?

Traders work on the floor of the New York Stock Exchange October 15, 2014.
Brendan McDermid—Reuters

Last week's tumultuous week in the stock market sets the stage for yet more nervousness and hand-wringing as a fresh set of earnings and economic data are due to be released.

When Wall Street opens for business on Monday morning, will bad news about the global economy be bad news for stocks?

That was the case for most of last week, when the equity market was hit with a frightening sell-off that reminded investors of the bad old days of the financial crisis.

^INDU Chart

^INDU data by YCharts

Or will bad news turn out to be good news for the market, as was the case on Friday, when the Dow Jones industrial average soared more than 260 points?

^INDU Chart

^INDU data by YCharts

Friday’s dramatic rebound in stock prices reflected two forces that are likely to move the market in the coming days.

Keep an Eye on the Fed

At the end of this month, the Federal Reserve is slated to end its stimulative bond-buying program known as quantitative easing.

Investors are naturally nervous about this development, as quantitive easing, or QE, has been credited for the strength and length of what is now a five-and-a-half-year-old bull market. As many market observers have noted, Wall Street is about to lose a major psychological crutch.

Remember that when the Fed ended its prior two rounds of quantitative easing — in 2010 and 2011 — stocks sold off fairly quickly:

After QE round 1, which ended March 31, 2010:
^SPX Chart

^SPX data by YCharts

After QE round 2, which ended on June 30, 2011:
^SPX Chart

^SPX data by YCharts

But late last week, when the market was in the throes of a selloff, St. Louis Fed president James Bullard said in a Bloomberg TV interview that “we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.”

In other words, a member of the Federal Open Market Committee that sets the nation’s interest rate policy is openly mulling whether the Fed should postpone ending QE in light of recent market volatility.

Bullard’s remarks on Thursday were enough to give the markets a lift in the last two days of the week. And if there are more signs of a major global economic slowdown, including a possible recession in Europe and Japan, then the Fed may have to think twice about how — and how soon — it ends its stimulus efforts.

This week, investors will want to see if more members of the FOMC sound similar conciliatory notes of extending QE. So far, no one else has. Boston Fed president Eric Rosengren, a major defender of QE, said on Friday that he does not expect the Fed to extend the program at this juncture.

What else should investors look for?

  • Wednesday’s inflation report from the Department of Labor. If the global economic slowdown is starting to impact the U.S., we will start to see it in the form of lower prices for U.S. consumers.
  • Thursday’s report on the index of leading economic indicators from the Conference Board. The LEI is forward-looking barometer of economic trends, so if the global slowdown is likely to affect the U.S. in the coming months, this index should offer clues.

Keep an Eye on Earnings

Last week’s bloody selloff was peppered by major earnings disappointments on Wall Street. For instance, there was Netflix, which reported that subscriber growth wasn’t as strong as expected and saw its stock lose more than a quarter of its value on Wednesday. Google also disappointed Wall Street on earnings and revenue growth, as well as on paid clicks on ad links.

The idea is that if Wall Street is about to lose its QE crutch, it will have to fall back on the fundamentals — so corporate profit reports will have to look good.

On Friday, a slew of companies led by General Electric and Honeywell announced better-than-expected results, which helped drive stocks higher at the end of the week.

Yet the mood on Wall Street regarding earnings is somewhat pessimistic. The strengthening U.S. dollar, brought about by the global economic slowdown, is expected to crimp global profits for U.S. exporters.

This week, several high-profile earnings announcements are due to be released. Here are the major ones to look for:

  • On Monday, Apple is due to report its results after the closing bell. Everything Apple reports is news these days.
  • On Tuesday, Coca-Cola will reports its results before the market opens. No company is as exposed to the global economy as Coke is.
  • On Wednesday, Boeing is set to reveal its earnings before the market opens. The global slowdown is expected to hurt U.S. exporters, and Boeing could be a sign of how bad things have become.
  • On Thursday, Amazon.com will report after the bell. Amazon isn’t just a bellwether of the tech economy, it is now a key gauge of the health of the U.S. consumer.
MONEY Markets

The Word on Wall Street Is It’s Okay to Be Bullish Again

After the market's triple-digit rebound on Friday, the bulls came out in force — on TV and social media. Here's how the talking heads explain the state of the market after one scary week.

After dramatic drops on Monday and Wednesday, the market took a turn for the better at the end of the week.

And the bulls started coming out of the woodwork.

“…the mid-week storm in the market was really a passing sun shower — though we did not know it at the time,” — Jonathan Lewis, chief investment officer, Samson Capital Advisors.

“…we remain steadfast with our multi-year bull-market scenario, as corrections and periods of consolidation are necessary ingredients to any prolonged bull market.” — Brian Belski, chief investment strategist BMO Capital Markets

“Whether the complete correction is over I’m not positive yet, but there looks to be some relative calm. I think the next leg is going to be higher.” – Jim Iuorio of TJM Institutional Services via CNBC

“The time to rebalance [and buy stocks] is when doing so requires courage and when things look ugly. Right now, investors are worried and see things as being ugly.” – David Kotok, chairman of Cumberland Advisors

A common theme from the bulls is that for all the worries about the global recovery, the U.S. economy looks solid:

“Ironically, the pullback in stocks has occurred against a backdrop of a strengthening U.S. economy.” — Gregg Fisher, chief investment officer at Gerstein Fisher

“The question is whether it is actually the beginning of a bear market. I don’t think so because I don’t expect a recession in the U.S. anytime soon.” — Edward Yardeni, president of Yardeni Research

Of course, Yardeni goes on to add that:

“the Eurozone and Japan may be heading in that direction now. So is Brazil. China is slowing significantly.”

Shouldn’t investors be worried, then, that a recession in the European Union could reverberate in the U.S.?

Fear not, the bulls have an answer for that:

“The impact of an E.U. slowdown on U.S. growth would be minimal: U.S. exports to the E.U. are a small proportion of GDP (2.8% in 2013)…” notes UBS economist Maury Harris.

Many point out that economic factors have not really shifted since a month ago, when the stock market seemed just fine.

“You can go deep in the weeds in this if you like, but the fact is that nothing fundamental has changed in recent weeks or months or quarters,” writes Jared Bernstein, a senior fellow at the Center for Budget and Policy Priorities.

In fact, global economic worries, which have led to lower oil prices, may end up being a boon.

Screen Shot 2014-10-20 at 9.38.52 AM

Many experts are saying that this week’s wild market swings are actually just the result of “narrative fallacy,” which leads investors to come up with explanations for market moves where they don’t necessarily exist — in this case placing blame on external forces like Ebola and fears of rising interest rates.

But who’s to say that the bulls aren’t the ones who are now coming with plausible-sounding explanations for why the rally should keep going?

For the record, the bears have more entertaining explanations in their quiver. For instance, there’s the McDonald’s theory. As in, “as the Big Mac goes, so goes the global economy.”

Permabear Marc Faber, who edits the Gloom Doom Boom site, noted the following:

“Now, McDonald’s is a very good indicator of the global economy. If McDonald’s doesn’t increase its sales, it tells you that the monetary policies have largely failed in the sense that prices are going up more than disposable income, and so people have less purchasing power.”

And Mickey D’s sales have been slumping badly lately.

Then there’s the so-called dental indicator.

Bloomberg Businessweek reported a nifty theory that says that the rate at which Americans cancel scheduled follow-up visits offers a good clue about the real state of the consumer — and in turn the financial markets.

“This is a forward indicator signifying lack of consumer confidence.” — Vijay Sikka, president of Sikka Software, as told to Bloomberg Businessweek

And the follow-through rate on follow-up dental visits has sunk to about where it was in 2007, just before the last downturn/bear market.

At this stage, it’s impossible to tell whether this is the start of bear market or a buying opportunity. However, what’s absolutely clear is that big dips are just a normal part of being a stock investor.

Despite anxieties about the Dow’s sudden plunge this week, if you look at historical performance, the index typically turns negative for the year often enough that it’s not a good doomsday indicator, says author and investment adviser Josh Brown.

Screen Shot 2014-10-20 at 9.39.39 AM

And at the end of the day, who’s to say which wacky theories wind up being right or wrong?

Screen Shot 2014-10-20 at 9.40.18 AM

TIME stocks

Stocks End Volatile Week With a Big Rebound, Dow Jumps 263 Points

Traders are seen reflected on an electronic display as they work on the floor of the New York Stock Exchange on October 17, 2014 in New York.
Traders are seen reflected on an electronic display as they work on the floor of the New York Stock Exchange on October 17, 2014 in New York. JEWEL SAMAD—AFP/Getty Images

Investors got a much-needed break from a week of upheaval as markets climbed on good economic reports and strong earnings

After all the upheavals in the stocks this week, the markets closed Friday up sharply to recover some of their recent losses.

The Dow Jones Industrial Average broke a six-day losing streak by finishing up more than 263 points, or 1.6%, to 16,380. The Nasdaq composite was up 41 points, or 1%, to 4,258 while the S&P 500 was up 24 points, or 1.3%, to 1,887. However, even with Friday’s gains, the S&P 500 was down more than 1% for the week, handing the index its fourth straight week of losses, it’s longest such streak since 2011.

A handful of reports showing U.S. economic growth helped to fuel the rebound. A Commerce Department report showed that U.S. home construction grew by 8.6% from August to September while another report showed that U.S. consumer had hit its highest point since July 2007.

Investors were also reassured by positive earnings on Friday from bellwether companies like General Electric and Morgan Stanley. GE’s shares were up 2.8% on strong quarterly results while Morgan Stanley gained 2.4%.

Every company in the Dow 30 was up for the day, led by a 3.3% bump for UnitedHealth Group.

European stocks also showed improvement to end the week with London’s FTSE 100 rising by 1.9% and Germany’s DAX getting a 3.1% boost.

However, despite Friday’s gains, the three major indices all remain down for the week after several days of losses. October has been a rough month for the U.S. markets, which have been hit hard by continuing concerns about economic growth slowing down in Europe and Asia along with fears of the growing global Ebola epidemic. Investors in the U.S. have also shown ongoing concern over the Federal Reserve’s plans to eventually raise interest rates sometime next year.

On Wednesday, for example, the market underwent multiple wild swings throughout trading – during which the Dow fell almost 460 points in one point before recovering somewhat to finish down by just over 170 points.

So far this month, the Dow Jones has dropped by nearly 4% while the S&P 500 has fallen 4.3% and the Nasdaq is down more than 5%.

This article originally appeared on Fortune.com

MONEY Markets

Four Reasons Not to Worry About the Stock Market

Waterfall
Roine Magnusson—Getty Images

Take a deep breath and consider some historical context.

The funniest thing about markets is that all past crashes are viewed as an opportunity, but all current and future crashes are viewed as a risk.

For months, investors have been saying a pullback is inevitable, healthy, and should be welcomed. Now, it’s here, with the S&P 500 down about 10% from last month’s highs.

Enter the maniacs.

“Carnage.”

“Slaughter.”

“Chaos.”

Those are words I read in finance blogs this morning.

By my count, this is the 90th 10% correction the market has experienced since 1928. That’s about once every 11 months, on average. It’s been three years since the last 10% correction, but you would think something so normal wouldn’t be so shocking.

But losing money hurts more than it should, and more than you think it will. In his book Where Are the Customers’ Yachts?, Fred Schwed wrote:

There are certain things that cannot be adequately explained to a virgin either by words or pictures. Not can any description I might offer here ever approximate what it feels like to lose a chunk of money that you used to own.

That’s fair. One lesson I learned after 2008 is that it’s much easier to say you’ll be greedy when others are fearful than it is to actually do it.

Regardless, this is a critical time to pay attention as an investor. One of my favorite quotes is Napoleon’s definition of a military genius: “The man who can do the average thing when all those around him are going crazy.” It’s the same in investing. You don’t have to be a genius to do well in investing. You just have to not go crazy when everyone else is, like they are now.

Here are a few things to keep in mind to help you along.

Unless you’re impatient, innumerate, or an idiot, lower prices are your friend

You’re supposed to like market plunges because you can buy good companies at lower prices. Before long, those prices rise and you’ll be rewarded.

But you’ve heard that a thousand times.

There’s a more compelling reason to like market plunges even if stocks never recover.

The psuedoanonymous blogger Jesse Livermore asked a smart question this year: Would you rather stocks soared 200%, or fell 66% and stayed there forever? Literally, never recovering.

If you’re a long-term investor, the second option is actually more lucrative.

That’s because so much of the market’s long-term returns come from reinvesting dividends. When share prices fall, dividend yields rise, and the compounding effect of reinvesting dividends becomes more powerful. After 30 years, the plunge-and-no-recovery scenario beats out boom-and-normal-growth market by a quarter of a percentage point per year.

On that note, the S&P 500’s dividend yield rose from 1.71% in September to 1.82% this week. Whohoo!

Plunges are why stocks return more than other assets

Imagine if stocks weren’t volatile. Imagine they went up 8% a year, every year, with no volatility. Nice and stable.

What would happen in this world?

Nobody would own bonds or cash, which return about zero percent. Why would you if you could earn a steady, stable 8% return in stocks?

In this world, stock prices would surge until they offered a return closer to bonds and cash. If stocks really had no volatility, prices would rise until they yielded the same amount as FDIC-insured savings accounts.

But then — priced for perfection with no room for error — the first whiff of real-world realities like disappointing earnings, rising interest rates, recessions, terrorism, ebola, and political theater sends them plunging.

So, if stocks never crashed, prices would rise so high that a new crash was pretty much guaranteed. That’s why the whole history of the stock market is boom to bust, rinse, repeat. Volatility is the price you have to be willing to pay to earn higher returns than other assets.

They’re not indicative of the crowd

It’s easy to watch the market fall 500 points and think, “Wow, everyone is panicking. Everyone is selling. They know something I don’t.”

That’s not true at all.

Market prices reflect the last trade made. It shows the views of marginal buyers and marginal sellers — whoever was willing to buy at highest price and sell at the lowest price. The most recent price can represent one share traded, or 100,000 shares traded. Whatever it is, it doesn’t reflect the views of the vast majority of shareholders, who just sit there doing nothing.

Consider: The S&P fell almost 20% in the summer of 2011. That’s a big fall. But at Vanguard — one of the largest money managers, with more than $3 trillion — 98% of investors didn’t make a single change to their portfolios. “Ninety-eight percent took the long-term view,” wrote Vanguard’s Steve Utkus. “Those trading are a very small subset of investors.”

A lot of what moves day-to-day prices are computers playing pat-a-cake with themselves. You shouldn’t read into it for meaning.

They don’t tell you anything about the economy

It’s easy to look at plunging markets and think it’s foretelling something bad in the economy, like a recession.

But that’s not always the case.

As my friend Ben Carlson showed yesterday, there have been 13 corrections of 10% or more since World War II that were not followed by a recession. Stocks fell 35% in 1987 with no subsequent recession.

There is a huge disconnect between stocks and the economy. The correlation between GDP growth and subsequent five-year market returns is -0.06 — as in no correlation whatsoever, basically.

Vanguard once showed that rainfall — yes, rainfall — is a better predictor of future market returns than trend GDP growth, earnings growth, interest rates, or analyst forecasts. They all tell you effectively nothing about what stocks might do next.

So, breathe. Go to the beach. Hang out with your friends. Stop checking your portfolio. Life will go on.

For more on this topic:

Check back every Tuesday and Friday for Morgan Housel’s columns. Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.

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MONEY The Economy

Why the Fed Should Stop Talking About Raising Interest Rates

Some central bankers have called for raising rates sooner rather than later. Recent economic data — and the huge stock market sell-off — should dampen those calls.

There have been two presidential inaugurations and six Super Bowl champions since interest rates were effectively lowered to 0%. Recently, some Federal Reserve officials have said they expect to raise rates by the middle of next year thanks to a decently expanding economy and stronger job growth.

Some central bankers, though, think the middle of 2015 is too late and have been pushing to increase borrowing costs sooner. Esther George, President of the Kansas City Fed, said as much in a speech earlier this month, and two members of the Federal Open Market Committee voted bristled against easy monetary policy in their most recent meeting.

But with developed economies around the world showing dismal growth and less-than-stellar economic metrics here at home — punctuated by a rapidly declining stock prices (the stock market is, after all, a reflection of the market’s forecast for the economy six to nine months down the road) — it might be time for these inflation hawks to quiet down.

“Until we see wages expanding faster than the rate of inflation, and significantly so, we won’t see much in the way of inflation pressure,” says Mike Schenk, Vice President of Economics & Statistics for the Credit Union National Association. “Why raise rates if you don’t have inflation?”

Inflation Hawks

Dallas Fed President Richard Fisher voted against the most recent monetary action policy, according to minutes of the meeting, due to, among other factors, the “continued strength of the real economy” and “the improved outlook for labor utilization.”

Earlier this month, Philadelphia Fed President Charles Plosser said that he’s “not too concerned” about inflation growth below the Fed’s 2% target and joined Fisher in voting against the Fed policy because he disagreed with the guidance that said rates will stay at zero for “a considerable time after” the Fed ends its unconventional bond-buying program later this month.

George, meanwhile in a speech earlier this month, said Fed officials should begin talking seriously about raising rates since “starting this process sooner rather than later is important. If we continue to wait — if we continue to wait to see full employment, to see inflation running beyond the 2% target — then we risk having to move faster and steeper with interest rates in a way that is destabilizing to the economy in the long term,” according to the Wall Street Journal.

Jobs

The jobs environment has been improving in recent months. The economy added almost 250,000 jobs in September and the unemployment number fell to a post-recession low of 5.9%. But the unemployment number doesn’t tell the whole story.

If you look at another metric that takes into account workers who only recently gave up looking for a job and part-time employees who want to work 40 hours a week, the situation is much worse. Before the recession, this broader unemployment rate sat at around 8%. It’s now at almost 12%. There are still about three million workers who’ve been unemployed for longer than 27 weeks, up from around 1.3 million at the end of 2007.

Inflation

Right now, and for some time, there has been very little inflation. Prices grew 1.7% over the past year in August, per the Bureau of Labor Statistics’s Consumer Price Index. Even the Fed’s preferred inflation tracker, the PCE deflator, showed prices gain 1.5% compared to 12 months ago.

Wage growth is likewise stalled. Taking into account wages and benefits, workers have only seen a 1.8% raise. It’s just difficult to have inflation in a low interest rate environment without wage growth.

St. Louis Fed President James Bullard recently said that the Fed should consider postponing the end of its bond-buying program. “Inflation expectations are declining in the U.S.,” he said in an interview yesterday with Bloomberg News. “That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE.”

Europe

European economic woes aren’t helping. Germany, Europe’s largest economy, recently cut it’s growth forecast, now only expects to grow by 1.2% in 2014 and 2015. Sweden and Spain saw prices actually decline in August, and now there’s fear that the euro zone will endure a so-called triple-dip recession. The relative prowess of the American economy compared to Europe’s has strengthened the U.S. dollar, thus making our exports less competitive.

Look, the U.S. economy isn’t about to go off a cliff. Not only did we see growth of 4.6% last quarter, but employers are adding jobs at a decent clip and the number of workers filing first-time jobless claims fell to the lowest level since 2000, per the Labor Department.

But with low inflation and European struggles to achieve anything close to robust growth, raising interest rates anytime soon doesn’t appear likely.

TIME Markets

European Stocks Tumble as Market Rollercoaster Ride Continues

Dow Jones Industrial Average Drops Over 200 Points
An information board on the floor of the New York Stock Exchange shows stocks dropping on Oct. 1, 2014 in New York City. Andrew Burton—Getty Images

‘Dead-cat bounce’ fails to hold, despite better-than-expected data from China

European stock markets turned lower again after a bright opening, as the prospect of deflation in the Eurozone returned to center stage.

Consumer prices rose only 0.3% in the year to September, Eurostat said, reinforcing fears that neither the European Central Bank nor Eurozone governments are doing enough to stop the 18-country currency union from falling into a deflationary spiral.

The figures instantly wiped out the gains of a “dead-cat bounce” at the market opening, which followed the general rout on Wall Street Wednesday.

U.S. stocks were down sharply again Thursday morning, but were lately working off their early losses.

In what was a roller-coaster ride for the U.S. markets on Wednesday, the Dow Jones index fell over 300 points at the open, and then recovered, only to dip about 460 points at one point in afternoon trading, finally closing down more than 173 points, or 1.1%.

By mid-morning in Europe, the U.K.’s FTSE 100 and Germany’s DAX were both down 2.0%, while yields on ‘safe haven’ government bonds such as Germany plummeted to new all-time lows. Oil prices also stayed close to three-year lows at just over $80 a barrel.

Data out of China earlier had given a modest degree of encouragement, suggesting that the world’s second-largest economy isn’t about to fall off a cliff. But it didn’t take long for fear to reassert itself at the expense of greed.

Analysts at Bank 0f America Merrill Lynch said in a note to clients that the markets have started to price in another recession and/or “a financial event” such as the collapse of a major market player. They said that markets were only likely to stop panicking “when policymakers start panicking.”

The day had started with the modest hope that there could be some progress in de-escalating the Ukraine crisis when Russian President Vladimir Putin meets his Ukrainian counterpart Petro Poroshenko at a summit meeting in Milan, Italy later in the day. Putin is also due to meet German Chancellor Angela Merkel and other European leaders there.

In a sign that investors may be starting again to bet on the Eurozone breaking up, bond yields have risen far more sharply in those countries where the combination of high debt and low growth is most acute–particularly Greece (and, to a lesser extent, Portugal and Italy).

Greece’s 10-year borrowing costs have risen by a shocking 2.43 percentage points since the end of last week, as markets signal they’ll refuse to finance a government that wants to dispense with the safety net of Eurozone and International Monetary Fund funding.

The tone in Asian markets earlier Thursday had been equally rough, with the Japanese Nikkei falling over 2% to a six-month low in the pull of Wall Street. Tokyo’s mood was still clouded by data on Wednesday showing that industrial output had fallen nearly 2% in August, adding to fears that a big rise in the country’s sales tax in May had after all been too much for the economy to withstand.

However, figures from China later underlined that the economy is only slowing moderately, rather than facing a “hard landing”.

Figures released by the People’s Bank of China showed that new loans by the official banking sector rose to 857 billion yuan ($140 billion) from 702 billion yuan in August, comfortably beating consensus forecasts of 750 billion.

However, there was no euphoria, as other elements of the PBoC’s figures were less reassuring. Foreign reserves fell, suggesting that capital has been leaving the country amid falling investment by foreign companies.

Moreover, aggregate financing–a measure of lending that takes in the vast ‘shadow banking’ system which has more exposure the country’s shaky real estate sector–stayed at historically low levels. Analysts at ANZ said that, overall, the figures suggest “shadow banking activities have been diminishing amid property weakness, and the genuine demand for credits still remains soft.”

This article originally appeared on Fortune.com

MONEY stocks

If This Is the Start of a Bear Market, Blame Alibaba

There's a possibility that the recent selloff morphs into a real downturn — and Alibaba's gaudy IPO may have marked the market's top.

It’s impossible to say if the recent plunge in the market is the start of a full-on downturn, or if it’s just a bout of short-term angst.

But if this does turn out to be an an official bear market, defined as a sustained drop of 20% or more, you can blame the Chinese e-commerce giant Alibaba and its celebrated initial public offering on Sept. 19.

That’s what famed bond fund manager Jeffrey Gundlach told CNBC earlier this week. Indeed, since Alibaba went public about a month ago, the broad market has lost almost all of its gains since the start of the year. And Alibaba itself has lost nearly 10% of its value.

BABA Chart

BABA data by YCharts

But it’s also what history says.

Bull markets are born at a time of fear, but as they mature, greed sets in. And at the top of the market, investors try to get their mitts on one last pot of gold.

That’s why many of history’s biggest downturns coincided with celebrated IPOs that exemplified the themes of the prior bull market.

You’ll recall, for instance, that in the summer of 2007, just as the financial crisis was getting going — and just months before the start of the 2007-2009 bear market — the private equity and financial services firm Blackstone Group went public … and proceeded to get hammered.

^SPX Chart

^SPX data by YCharts

And before that, in April 2000, AT&T Wireless went public just days after the market peaked on March 24, 2000.

In Alibaba’s case, the company exemplified the hot themes that had been driving the five-and-a-half-year-old bull market. That is, exposure to technology, mobile, social media, and China.

But all of that may prove to have been too much of a good thing.

MONEY stocks

Here’s the Deeply Depressing News About This Market

A trader watches the screen at his terminal on the floor of the New York Stock Exchange in New York October 15, 2014.
Lucas Jackson—Reuters

Sadly, there may be no safe havens this time. Stock investors typically turn to dividend payers and "low-volatility" stocks in rocky times. But those investments have gotten pricey.

When the stock market gets choppy, as it is now—the Dow Jones industrial average plunged by triple digits again on Wednesday — equity investors tend to set sail for calmer waters.

Historically, that’s led them to a few sheltered corners of the market.

First, there are high-yielding stocks, where payouts to shareholders serve as a cushion when stock prices crater. Dividend-paying stocks don’t prevent losses altogether—this is the stock market after all—but during the 2008 financial crisis, for instance, when the S&P 500 S&P 500 INDEX SPX 0.9143% lost 37% of its value, the SPDR S&P 500 Dividend ETF SPDR SERIES TRUST DIVIDEND ETF SDY 1.0732% fell just 23%.

Investors also look for safety in so-called low-volatility stocks. These are shares of “steady Eddie” companies, often found in stable but slow-growing and boring businesses, that usually gain less than the broad market during upturns but lose less in downturns. Among the biggest holdings of the PowerShares S&P 500 Low Volatility ETF POWERSHARES ETF II S&P 500 LOW VOLATILITY PORT SPLV 0.8661% , for example, are Coca-Cola THE COCA COLA CO. KO 0.9562% and Warren Buffett’s insurance and holding company Berkshire Hathaway .

History says that both dividend payers and low-volatility stocks not only provide ballast in turbulent times but actually outperform the broad market over the long run.

Normally, tilting your portfolio toward either of these types of stocks would make sense if you’re worried that the recent jump in volatility — as seen below in the CBOE VIX “fear” index — is a sign of worse things to come.

^VIX Chart

^VIX data by YCharts

Trouble is, nervous investors jumped the gun and bid up shares of dividend payers and “low-vol” investments before volatility actually manifested in the economy. Indeed, from 2009 to the start of this year, dividend investing proved to be one of the easiest ways to beat the market:

^SPX Chart

^SPX data by YCharts

In other words, these two conservative and time-tested ways to stay in stocks are now expensive on a relative basis. And recent history tells us that buying an overvalued stock is fraught with risk.

Take dividend payers. They typically sport lower price/earnings (P/E) ratios than the broad market because high-yielders tend not to grow that fast. (That’s why they return dividends to shareholders in the first place.) But these days the average P/E for stocks in the SPDR S&P 500 Dividend ETF is 18.3, based on projected future corporate earnings. By comparison, the average stock in the broad market trades at a P/E of 17.

Similarly, the average holding in the PowerShares S&P 500 Low Volatility ETF trades at a higher-than-average P/E ratio of 18.

The problem with these frothy prices is that they detract from the stability that these types of stocks normally provide. Feifei Li, head of research at Research Affiliates (a major proponent of low-volatility investing), published some thoughts last year about rising prices and valuations in the low vol space. Li noted:

Empirical evidence demonstrates that low volatility strategies offer higher-than-market returns and considerably lower risks… Not surprisingly, these desirable performance characteristics have attracted many players to the market … The fast pace of growth raises the question: Does the rapid flow into this space erode the strategy’s effectiveness in delivering attractive risk-adjusted returns? This is a legitimate concern.

Does this mean you should avoid low-vol stocks and dividend payers altogether? No, but it will take more work to find the handful of examples of these types of stocks that are undervalued and attractively priced.

Hey, no one said avoiding a downturn — while remaining in the stock market — would be easy.

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