Outlook for 2014
The Fed, in its latest announcement, has further reduced its bond buying program to $55 billion a month, signalling that the improvement in the economy is on track. Going by the current pace of tapering, the bond buying program may end around October this year, making way for a rise in the Fed Funds rate. Jennet Yellen, the Chairwoman of the Fed, on the timeline for an increase in the Fed Funds rate, said, “It’s hard to define but, you know, probably means something on the order of around six months”—after the end of the bond buying program.
The unemployment rate has fallen to 6.7%, closer to the Fed’s comfort level of 6.5%, and the housing market activity has increased. While global tensions remain, the U.S. economy is clearly on a path to a stronger recovery.
This implies that the operating performance of corporations will improve, resulting in better days for stocks and, in turn, equity ETFs like the iShares Core S&P 500 ETF (IVV). While interest expenses on corporations’ income statement may rise on the back of an expected increase in interest rates, the improvement in operating performance is expected to offset this rise.
On the other hand, prices for bonds and ETFs like the Vanguard Total Bond Market ETF (BND) are expected to continue moving southwards as yields go up, leading to a fall in bond prices. Bond yields and prices share an inverse relationship.
The improvement in housing activity is expected to improve the prospects for home improvement companies such as Home Depot (HD) as well as real estate ETFs such as the iShares US Real Estate ETF (IYR) and the Vanguard REIT ETF (VNQ).
To learn more about important trends that affect your fixed income investments, check out Market Realist’s Fixed Income ETFs page.