The Janet Yellen Era: Chapter Two
Former Fed Chair Janet Yellen, if installed as Secretary of the Treasury as expected, should help to calm Main Street and Wall Street alike.
The return of Janet Yellen to influence, as incoming Secretary of the Treasury (if confirmed by the Senate), stands to settle nerves on both Wall Street and Main Street.
That’s because Yellen’s tenure as leader of the Federal Reserve, which lasted from January 2014 to February 2018, was bountiful for business profits, job growth and investors in everything from municipals and triple-B-rated corporate bonds to utility stocks and the Dow Jones Industrial Average. The Nuveen High Yield Municipal Fund (NHMAX) turned $10,000 into more than $14,000 during the interval, and the Dow grew from 16,350 to 26,000.
This was not a one-woman show, of course. But Yellen’s presence reduces the likelihood that damaging political infighting will continue.
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“A great pick for Treasury Secretary,” says Jack Janasiewicz, chief portfolio strategist for Natixis Investments, parent of Loomis Sayles and a dozen other money managers. “We need fiscal support, and her presence will end the communication gaps and put pressure on Congress” to enact critical appropriations for, say, strapped state and local governments, Janasiewicz says.
And yet, some interest rate pundits and scolds are warning that bonds will soon get walloped, stocks slammed and the economy eventually strangled because Yellen (and the rest of the Biden economic team) sound soft on fighting inflation while they battle high COVID-time unemployment.
But the relationship among prices, interest rates and jobs is no longer as absolute as the doctrine you learned in Economics 101. There is no evidence that if economic growth and employment recover somewhat in 2021 (which Kiplinger forecasts), then the cost of borrowing, in the form of rising rates, must accelerate.
Standard & Poor’s global chief economist Paul Gruenwald explains that there is a palpable difference between asset-price inflation, such as rising stock and bond prices and real estate values, and increases in the cost of living – the day-to-day ingredients of the indexes that influence interest rate movements and monetary policy. The former can rise without pushing the latter up and scaring away investors.
That has been the reality since the end of the 2008 financial crisis. The shock of the pandemic interrupted it briefly. But for financial markets, COVID ranks as more of a one-off natural disaster than permanent climate change.
Trust the Yield Rally
That means you should not overreact to the virus’s frustrating staying power or to the change of administration and its initial economic policy proposals.
With short-term interest rates frozen near zero and the Senate about to approve targeted Treasury aid for the economy, investments that pay a decent yield are rallying. Between Nov. 3 and Dec. 4, the Alerian MLP Infrastructure Index, a collection of pipeline partnerships, soared 38%. The Bloomberg Barclays U.S. Corporate High Yield Index is up 4% in that time, and the KBW Nasdaq bank-stock index has risen 18%. And the FTSE Nareit Mortgage REITs Index, tracking mortgage real estate investment trusts, jumped 21%.
These gains are backed by some serious current yields: nearly 4% for junk bonds and bank stocks; 9% to 12% for pipelines and mortgage REITs. Clearly, instead of interpreting events in Washington as perilous to such higher-yielding investments, investors see a continued spirited market for income. That’s not likely to change.
And neither should your comfort level with these kinds of holdings as the political guard changes. Besides Yellen’s expertise and knowledge of who and what are behind every door in the capital, several sources have told me that the markets did not want extreme progressive acolytes steering the economy.
That worry has faded with Yellen’s nomination. And so should any worries of yours.
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