Investors Give Bernanke an A
With the economy accelerating, market participants and watchers wish a warm goodbye to the Fed chairman.
When George W. Bush nominated Ben Bernanke in October 2005 to chair the Federal Reserve Board, the Dow Jones industrial average stood at a then-shiny 10,385, ten-year Treasury bonds yielded 4.5%, 30-day T-bills paid 4.25%, and the U.S. economy was growing at an annual rate of 4.3%. Whether you were aggressive with your money or ultra-conservative, you were earning a decent return. Investors ushered chairman Alan Greenspan out of office to thunderous acclaim, although his legacy would suffer a mortal blow from the credit crisis of 2008.
Eight years later, Bernanke also exits with investors in a joyous mood. The stock market returned a spectacular 32% in 2013, and most segments of the bond market managed to survive a spike in long-term interest rates with only small losses. After years of tepid expansion, the U.S. economy has begun to accelerate. Jobs, real estate and manufacturing are coming back, and gross domestic product rose a robust 4.1% in the third quarter of 2013. The usually cranky fund managers, economists and bond market strategists I speak with unanimously award the outgoing Fed chairman, a former Princeton professor, high grades.
Of course, market performance isn’t the only criterion for judging a Fed chairman’s tenure. That said, if you’re unhappy with the way your IRA and 401(k) performed under Bernanke, you have missed opportunity after opportunity. Indeed, the speed and degree to which Fed policies have restored investor confidence is remarkable.
Maybe investors are a little too confident. But if you expect me to use this space to say, Whoa, watch out, storm clouds are gathering, the smart money is antsy, and Bernanke’s reputation will burn like Greenspan’s, you’ll be disappointed. I just don’t see the catalysts for a financial disaster, at least not in the coming year.
One big concern—that investment markets would react negatively to the Fed’s plan to pare back its bond-buying program—has proved to be misplaced. Bernanke shrewdly combined his introduction of the taper with a pledge to keep short-term interest rates near zero even longer than had been supposed. That sparked the stock market’s pre-Christmas spurt and suggested that tapering alone would not be disastrous. What would scare the markets, especially for bonds and mortgage securities, would be a proclamation by the Fed that it plans to sell the trillions of dollars’ worth of government securities it has accumulated. That’s about as likely as the world dumping dollars for bitcoins.
What to buy. So what does this portend for your income investments? To be honest, not a whole lot. I’ll stick with the ideas I offered in my last two columns. Treasury bonds yielding 3% remain unattractive, but funds that invest in GNMA securities are a good alternative if you want to own bonds backed by Uncle Sam’s full faith and credit. Tax-free municipal bonds are generally more appealing than taxable debt. Bank-loan funds are fine, too.
On the stock side, look for companies that pay generous dividends and raise them regularly. For a core investment, a top-tier balanced fund is ideal. But avoid funds that place the bond portion of their portfolios in debt with long maturities. For example, the bonds in Dodge & Cox Balanced (symbol DODBX) have a much shorter duration (a measure of rate sensitivity) than those in Vanguard Wellington Fund (VWELX), which, by the way, is closed to new investors. For 2014, I’m betting that Dodge & Cox beats Wellington in the battle of the balanced funds.
As for the Fed, let’s hope that new chairman Janet Yellen does as good a job as Bernanke did in conducting the nation’s monetary policy and keeping investors—and the economy—out of harm’s way.