I get a little
concerned when there's a consensus
in the bond market and there
seems to be one -- that the
Fed will cut rates in early
2007. I think the chances
are that we'll have rates
moving either side of 4.5
percent. We could go up to
5.5 percent or down to 4 percent.
I don't think there will be
a big drop. One big question
involves concern about the
housing market. The concern
isn't about six to eight months
of slower sales, but if the
housing market goes off the
cliff, the Fed will cut in
a big way. I don't think the
housing market will necessarily
fall off the cliff.
I think the economy will continue to grow, probably 2 percent to 2.5 percent in 2007. It's still growing, I don't see a recession. Corporate balance sheets are too good right now. The consumer is still in OK shape other than the previously mentioned housing. I think the stock market could do 7 percent to 8 percent next year because overall fundamentals in the stock market are OK and so are valuations.
Historically, the third year of a presidency is a great year -- the best by a long shot of all four years.
Consumers have to look at overall goals and objectives -- that's the most important thing. The majority of our accounts are balanced 50 percent to 60 percent in equities and, since we buy individual bonds, we'll hold fixed income at the 40 percent to 50 percent level. We don't know where rates will be. We ladder bonds and CDs. Consumers should look to laddering CDs but not beyond five years. A barbell approach should work very well because two and three years out is a little problematic. I'd put a fair amount in three month CDs to one-year CDs and also in four- and five-year CDs. Don't ignore two- and three-years, but concentrate in shorter and longer maturities.
The temptation is to put a lot of money in real short-term instruments because you'll get paid more in a high-yield money market than in a 10-year Treasury. But I'd be cautious. Sometimes things I don't think will occur do occur. If the housing market goes in the toilet they'll be lowering rates in a major way and we could be revisiting interest rate levels of 2003 and, if that happens, you'll be glad you invested in longer-term maturities.
