On August 8, 2006 the FOMC did not raise the target Fed Funds rate. Their statement noted that the rate of growth of the economy was slowing. This slowing might moderate the inflationary pressures building in the economy. Some stock market participants like this and have been trading up the market. Others believe the Fed has already raised rates too high and that we are headed for a recession in the near term.
What do you think? The S&P500 traded up on the original decision, but has traded sideways for the last 12 days since 18 August. The market can't make up its mind.
If you think the Fed has gone too far, you can become more defensive. One way to do that is to increase the number of dividend paying stocks you hold in the portfolio. The income from the dividends keeps the stock from going down as far as the index in an economic downturn. It also provides income to offset some of a negative price change.
So are you becoming defensive or are you still riding the bull?
Which bull was that? My bull died a vicious fiery death about five years ago. Ever since then, I've basically been rotating in concentric circles, getting nowhere fast. I've become increasingly defensive, especially over the course of the last three months (or so), shifting a significant percentage of my personal portfolio's weighted asset allocation out of large-cap stocks, into short-term notes, certificates of deposit, and other near-term laddered debt instruments. I remain unencouraged by much of the current economic data, and the lack of intelligent political direction or leadership in evidence lately.
Posted by: Bob Hansell | August 30, 2006 3:37 PM | Permalink to Comment