Does Black Friday Matter?

As we prepare for the retail launch of the holiday season, here’s a question worth tackling: Does Black Friday (or Gray Thursday) matter? If you’re the kind of shopper that delights in the adrenaline rush of shopping in the wee hours of the Friday after Thanksgiving, go for it. For the rest of us, it may be better to just enjoy a long weekend. Although you are likely to be barraged by offers, according to the New York Times, “the chances of snatching a great deal for a quality item are slim, largely because Black Friday is mainly designed for retailers to clear out unwanted goods, and because best-selling products rarely drop much in price.” Those warnings are unlikely to deter the throngs--Black Friday is still expected to be the Number One shopping day of the year, despite a drop off in sales estimates over the past two years.

Overall, Americans are expected to increase holiday spending, which includes all of November and December, by 3 to 3.5 percent from a year ago, according to the research firm eMarketer. Warning: don’t pay too much attention to the estimate from the National Retail Federation (NRF), which calls for a 3.6 percent increase in holiday spending in 2016. The NRF’s projections tend to overestimate sales growth because of its shaky methodology, which relies on asking consumers how much they spent last year, and how much they plan on spending this year.

With the election settled and wage growth strengthening, there could be an upside surprise to retail results this holiday season. Regardless of whether sales increase by more or less than expected, the focus will return to the growth of digital. In a report last week, the government said that overall e-commerce jumped 15.7 percent in the third quarter from a year ago, while total retail sales increased 2.2 percent in the same period. Still, most shopping still occurs in physical stores. Last quarter, E-commerce accounted for just 8.4 percent of overall retail sales.

But these numbers are somewhat misleading, because overall retail sales include the big-ticket automobile category, as well as gas and groceries. According to consultancy Strategy&, these groups are responsible for almost half of total retail sales. Without them, online’s penetration of its “addressable market” is closer to 16 percent.

The subset of digital commerce that continues to power sales is mobile. According to Adobe Digital research, in 2016, “mobile will overtake desktop for the first time in terms of driving visits to a website during the holiday season.” But consumers are using their phones more to research than to make purchases.

If you do plan to get busy this week, here are few things to keep in mind:

• Make a list of products you want to buy and start tracking their prices on Google and Amazon and then on PriceGrabber or PriceJumpon savings.com.
• The hottest gifts this season are expected to be VR devices (Oculus, PlayStation VR and HTC Vive), Pokémon, Barbie, Lego, Hot Wheels and Frozen toys, as well as Google Home and Amazon Echo.
• When you log on is important. The Monday before Thanksgiving is good for electronics; if apparel is on your list, the biggest discounts will be highest on Tuesday; and the majority of Walmart’s Black Friday deals, are available to online shoppers starting at 12:01 a.m. on Thursday. Thanksgiving Day is the best day for jewelry purchases.
• Black Friday deals: Cheap electronics, video games, DVDs, and gaming systems. And while it may not exactly be on Santa’s list, Friday may also be a good day to close a deal on a new car, as dealers seek to clear out inventory and boost sales. Cyber Monday can be ideal for toys, which are 13 percent less expensive than they were in October, according to Adobe.
• Don’t be loyal: Despite the ability to find steep discounts, 25 percent of customers will end up paying higher prices because they are loyal to a retailer.
• Download ShopSavvy, before you hit the brick and mortar stores…the app can scan barcodes and compare at other big retailers.
• Check out CNET’s Black Friday Guide, which highlights the best deals at many of the nation’s top retailers and Consumer World’s Black Friday Week Tips for Bagging a Bargain.
• Sobering reminder: The best deals always occur AFTER the holidays.

MARKETS: The post-election selloff in the bond market continued, as investors bet that the Trump administration will boost spending, cut taxes and as a result, spark an increase in inflation. The yield on the benchmark 10-year note closed at a 12-month high and logged the biggest two-week gain in 15 years. The Treasury bond market is on pace for the biggest monthly negative return since December 2009 and the overall bond market has seen the biggest two-week rout in data going back to 1990.

• DJIA: 18,868, up 0.1% on week, up 8.3% YTD
• S&P 500: 2182, up 0.8% on week, up 6.8% YTD
• NASDAQ: 5321, up 1.6% on week, up 6.3% YTD
• Russell 2000: 1315, up 2.6% on week, up 15.8% YTD
• 10-Year Treasury yield: 2.34% (from 2.12% week ago)
• British Pound/USD: 1.2356 (from 1.2593 week ago)
• December Crude: $45.54, up 5.3% on week
• December Gold: $1,208.30, down 1.3% on week, 9-month low
• AAA Nat'l avg. for gallon of reg. gas: $2.15 (from $2.18 wk ago, $2.12 a year ago)

THE WEEK AHEAD:

Mon 11/21:

8:30 Chicago Fed National Activity Index

Tues 11/22:

10:00 Existing Home Sales

Weds 11/23:

8:30 Durable Goods Orders

10:00 New Home Sales

10:00 Consumer Sentiment

2:00 FOMC Minutes

Thursday 11/24: US MARKETS CLOSED THANKSGIVING

Large stores open:

3pm JC Penney

4pm Old Navy (some locations only)

5pm Best Buy, Toys R-Us, Macy’s

6pm Wal-Mart, Sears, Kohl’s, Target

7pm K-Mart

Large Stores Closed:

TJ Maxx, Marshall’s, Staples, Office Depot, BJs, Costco, GameStop, Lowe’s, Nordstrom’s, Neiman Marcus, Christmas Tree Shop

Friday 11/25 BLACK FRIDAY

1:00 Stock Markets close early

Bond Market Bingo

The promotion for the 1965 movie, “Beach Blanket Bingo” was simple: “Frankie (Avalon) and the gang are hitting the beach for some good old-fashioned shenanigans!” There happen to be some strange shenanigans in the bond market this summer, as some global investors are willing to accept negative interest rates for the bonds that they are purchasing. It’s the financial equivalent of BOND Blanket Bingo! Why would someone choose to automatically lose money? That is what occurs when investors buy bonds with negative yields, and hold them to maturity. Yet, with worldwide growth petering out, persistent low inflation and uncertainty about everything from Brexit to the US Presidential election, money has been pouring into government debt, pushing up prices and driving down yields.

Currently there is about $13 trillion worth of global sovereign debt yielding less than zero. Last year, Switzerland became the first country to sell debt at negative yields, followed by Japan, which did so in March. And then earlier this month, Germany became the first eurozone country to sell 10-year bonds with a negative yield in a government auction.

Under normal conditions, you would purchase a bond at a discount, meaning that you would pay $99.50 for a bond. Then at the end of the term, the government would send you $100 at maturity. But in the topsy-turvy negative yield world, you buy the bond at a premium, say $101 and only get back $100 at maturity.

Why would anyone lend money to a government for ten years, only to be contractually obligated to see less than the total amount returned? There are a number of reasons that this market quirk is occurring. Many investors believe that global central banks, like the European Central Bank, the Bank of England and the Bank of Japan, will continue to buy bonds to stimulate economies and therefore, the price of bonds will keep rising. In that case, an investor might accept a negative interest rate because she thinks that she can sell that same bond for even more money to someone more desperate for safety.

Others purchase negative yielding debt because they need a safe, liquid investment, amid uncertain conditions. These investors equate buying a negative yielding bond with paying for portfolio insurance against future economic disaster. For them, it is cheaper to lose a bit of money on a government bond than to park vast sums in a vault and then pay a guard to watch over the stash.

There is another point to consider: with little or no inflation to erode purchasing power, some accept lower yields, because “even if you earn zero percent or less on your savings, you still come out ahead,” according to Capital Economics. That’s why when compared to negative rates, receiving only 1.6 percent for a 10-year US government bond doesn’t sound too bad.

But low yields are tough to take for retirees who need to create an income stream from their savings. Many of these folks had planned on generating something closer to 3 percent from their “safe” assets, which is why many are turning to riskier, corporate junk bonds, which are yielding a comparatively juicy 5.5 percent.

But what seems great today can quickly seem terrible if/when the economy turns south and enters into a recession. At the end of 2008, after the financial crisis hit, junk bond yields soared to over 20 percent, which meant that the prices of these once-sought after instruments, had plunged. That’s why in Bond Market Bingo, the risk is not just that your number was not called, but that you could lose money in the process.

Bonds with Negative Yields

When investors buy bonds with negative yields, and hold them to maturity, they will automatically lose money. Yet, with worldwide growth petering out, persistent low inflation and uncertainty about everything from Brexit to the US Presidential election, money has been pouring into government debt, pushing up prices and driving down yields. Currently there is about $13 trillion worth of global sovereign debt yielding less than zero. Last year, Switzerland became the first country to sell debt at negative yields, followed by Japan, which did so in March. And then earlier this month, Germany became the first eurozone country to sell 10-year bonds with a negative yield in a government auction.

Normally, you would purchase a bond at a discount, meaning that you would pay $99.50 for a bond. Then at the end of the term, the government would send you $100 at maturity. But in the topsy-turvy negative yield world, you buy the bond at a premium, say $101 and only get back $100 at maturity.

Why would anyone lend money to a government for ten years, only to be contractually obligated to see less than the total amount returned? Many investors believe that global central banks (ECB, Bank of England and Bank of Japan) will continue to buy bonds to stimulate economies and therefore, the price of bonds will keep rising. Others purchase negative yielding debt because they need a safe, liquid investment. It is in fact cheaper to lose a bit of money on a government bond than to park vast sums in a vault and then pay a guard to watch over the stash.

An investor might also accept a negative interest rate because she thinks that she can sell that same bond for even more money to someone more desperate for safety. Or perhaps she fears future craziness in the financial world and wants to be sure to keep a portion of her portfolio stable. The former is a variation of the greater fool theory, while the later is a variation of paying for portfolio insurance against future economic disaster. There is one more point to consider: with no inflation to erode purchasing power, investors are choosing to accept lower yields, because “even if you earn zero percent or less on your savings, you still come out ahead,” according to Capital Economics.

Amid the low/negative yield world, the Fed is set to begin a two-day policy meeting this week. It is widely expected to do a whole lot of nothing, but there will be close scrutiny of the accompanying statement. The focus will be on how the Fed describes economic conditions. While job creation has tapered off to 170,000 per month, down by about 50,000 from a year ago, a slowdown is consistent with an aging recovery. With wages picking up, underlying retail sales growth close to a two-year high and core inflation inching towards the Fed’s desired target of two percent, the central bank may surprise markets with a September rate hike. Right now the bond market implies just a one in five chance of that occurring, but stay tuned for Chair Janet Yellen’s appearance at the Jackson Hole symposium on 26th August. Many Fed chairs have used Jackson Hole as place to float future policy moves.

Any rate increase could come as a big surprise to all of those sovereign bondholders. It is worth noting that a one percent increase in interest rates would push down 10-year prices by 9 percent – so much for safety!

MARKETS: Large indexes closed at all-time highs for the second week in a row.

• DJIA: 18,570, up 0.3% on week, up 6.6% YTD
• S&P 500: 2175, up 0.6% on week, up 6.4% YTD
• NASDAQ: 5100, up 1.4% on week, up 1.8% YTD
• Russell 2000: 1212, up 0.6% on week, up 6.8% YTD
• 10-Year Treasury yield: 1.566%, (from 1.547% a week ago)
• British Pound/USD: $1.3105 (from $1.3214)
• September Crude: $44.19, down 3.8% on week
• August Gold:  at $1,323.40, down 0.3% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.17 (from $2.22 wk ago, $2.74 a year ago)

THE WEEK AHEAD: While the US economy is not exactly firing on all cylinders, it is far better than other developed nations. When the government releases the first estimate of second quarter growth this week, economists expect a rebound to 2.5 percent, up from the disappointing 1.1 percent level in Q1.

Mon 7/25:

10:30 Dallas Fed Mfg

Tues 7/26:

Apple, Caterpillar, Under Armour, Verizon Communications 

9:00 S&P Case-Shiller HPI

10:00 New Home Sales

10:00 Consumer Confidence

FOMC Meeting Begins

Weds 7/27:

Boeing, Coca-Cola, Whole Foods Market

8:30 Durable Goods Orders

10:00 Pending Home Sales Index

2:00 FOMC Meeting Announcement

Thursday 7/28:

CBS, Dow Chemical, Ford, Marriott

8:30 International Trade

Friday 7/29:

ExxonMobil, Merck, United Parcel Service, Xerox

8:30 GDP

8:30 Employment Cost Index

9:45 Chicago PMI

10:00 Consumer Sentiment

June Jobs Take Off: Stocks Surge

The better than expected June jobs report was a much-needed shot in the arm for the recently sagging labor market. The economy added 287,000 jobs, including the return of about 30,000 striking Verizon workers, and the unemployment rate rose to 4.9 percent, but did so for a good reason: more people entered the labor force in search of work. Along with a terrible May (revised down to just +11,000 jobs, the weakest month of hiring since the job recovery began in 2010) and a mediocre April (revised up to +144,000), June’s numbers brought second-quarter average monthly job creation to 147,000 – that’s down from 196,000 in the first quarter, 229,000 last year and 260,000 in 2014. The big question now: is the recent trend portending weakness in the economy or is it a natural slowdown, as we begin the eighth year of the recovery?

Other parts of the report complicate the answer. The broad measure of unemployment U-6), fell to 9.6 percent, down 0.9 percent from a year ago, but more than a percentage point above its pre-recession level. Meanwhile, hourly pay increased by 2.6 percent from a year ago, matching the highest level of the recovery.

My guess is that the labor market is tightening and that something weird occurred in May. That said, more data is necessary to determine the direction of the labor market, which also means that the Fed is unlikely to take any action at its policy meeting at the end of this month.

Next question: Would a strong summer hiring season encourage the Fed to consider an increase at the September meeting? Maybe, but European politics may again force a delay in the Fed’s rate hike cycle. If you liked “Brexit,” you’re going to love “Quitaly”. In October, Italians will head to the polls to vote on whether to oust the current prime minister, potentially leading to a general election in which the anti-European Five Star Movement could gain ground and advance their call for Italy to withdraw its membership of the euro, though the party supports EU membership. As the vote nears, Italy is once again confronting the possibility of bailing out the world’s largest bank, Monte dei Paschi, which continues to hold nearly $400 billion of non-performing loans on its books, by far the largest in the EU.

According to Capital Economics, a survey in May “showed that 58 percent of Italians wanted a referendum on their EU membership. Granted, only 48 percent said that they would vote to leave. But the final UK opinion poll last week also suggested that only 48 percent would vote to leave the EU.” In other words, add you should probably add “Quitaly” to your summer lexicon.

MARKETS: Last week, the yield on the 10-year U.S. Treasury note touched a record low of 1.321 percent and the 30-year also checked in with its own record low of 2.098 percent. Yes, that means that if you lend the US government money for THIRTY years, you would receive a paltry 2.1 percent in interest. Meanwhile, stock indexes charged higher on the week, nearing all time highs reached in May 2015. As earnings season begins this week, investors will have to reconcile current prices with a likely fifth straight year-over-year quarterly profit decline.

• DJIA: 18,146, up 1.1% on week, up 4.1% YTD, now above pre-Brexit level (18,011)
• S&P 500: 2130, up 1.3% on week, up 4.2% YTD, 1 point below 05-15 record high
• NASDAQ: 4956, up 2% on week, down 1% YTD
• Russell 2000: 1177, up 2.2% on week, up 3.6% YTD
• 10-Year Treasury yield: 1.366%, a record low close (from 1.45% a week ago)
• British Pound/USD: $1.295, a 31-year low
• August Crude: $45.41, down 7.3% on week, largest percentage loss since Feb
• August Gold:  at $1,358.40, up 1.5% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.25 (from $2.28 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 7/11:

Alcoa

10:00 Labor Market Conditions

Tues 7/12:

6:00 NFIB Small Biz Optimism Index

10:00 Job Openings and Labor Market Turnover

Weds 7/13:

8:30 Import/Export Prices

2:00 Fed Beige Book

2:00 Treasury Budget

Thursday 7/14:

BlackRock, JPMorgan Chase, Yum! Brands

The Bank of England interest rate decision (the first post-Brexit announcement)

8:30 PPI-FD

Friday 7/15:

Citigroup, U.S. Bancorp, Wells Fargo

8:30 CPI

8:30 Retail Sales

9:15 Industrial Production

10:00 Business Inventories

10:00 Consumer Sentiment

#279 Making Money in a Low Return World

Making money in a low return world is tough. Last week, the yield on 10-year US government bonds touched an all-time low and stocks have been stuck in neutral for two years. Given the current environment, return caller Ryan asked whether one asset allocation fits all portfolios? In other words, should you put those investments which are likely to appreciate the most in a Roth IRA, where you will never have to pay taxes on the gains? It may take some some work, but the idea has merit.

• Download the podcast on iTunes
• Download the podcast on feedburner
• Download this week's show (MP3)

Heather Long, CNNMoney's senior markets and economy writer, joins the show to weigh in how you can make money in the current low return era. Heather notes that most forecasters now expect below average returns for the major asset classes over the next five years. She helps us decide what to do about it. Heather also discussed politics, diving into the question: Who’s better for your money: Trump or Clinton?

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Will Fed Wait Until Dec to Raise Rates?

Seven years ago, the recession officially ended. According to the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, the organization responsible for declaring the beginning and end of U.S. expansions and contractions, June 2009 was the nadir of the worst recession since the Great Depression. Yes, employment bottomed out six months after the official end date, but that NBER says that is to be expected, because a recession “is a period of diminishing activity rather than diminished activity.” In other words, although the economy was still weak after June 2009, with lingering high unemployment, it had expanded considerably from its trough 15 months earlier. Where does that leave us today? The U.S. has seen a sluggish recovery, but the economy is far better off than it was seven years ago, by almost every objective metric. That said, a seven year expansion seems ripe for a breather, which is why so many are worried about the next recession. Adding to the concern was a report last week from the World Bank, which downgraded global growth estimates. “Overall growth remains below potential” and “looking ahead, the prospects of global growth remain muted.”

As expected, the commodity exporters have been hit particularly hard, but even advanced economies are stymied by sluggish growth. U.S. GDP is likely to be about 2 to 2.2 percent this year, consistent with the pace experienced over the past few years and the last few jobs reports have shown deceleration.

Amid this environment, it’s hard to see how the Federal Reserve could possibly raise interest rates when it meets this week. Although many central bankers went on a speaking junket in May, telling us that the U.S. economy had shown enough progress that a rate hike would be appropriate in the “coming months,” but the recent jobs data, combined with the dour World Bank assessment, makes it nearly impossible for the Fed to budge this week.

Instead, it’s back to parsing the Fed’s accompanying statement, the updated FOMC projections and Chair Janet Yellen’s press conference, for any signals of when the next rate hike might come. The answer, according to Capital Economics, “depends on whether the weakness in payroll employment in not just May but April too was a temporary blip or the start of a more serious downturn.”

If hiring picks up and the U.K. votes to remain within the European Union on June 23rd, the next Fed meeting at the end of July could be a possibility, but it would be a long shot. The more likely possibility would be the September meeting. If not September, it’s hard to fathom Fed action in November, just days before the presidential election. Unless there is a big uptick in economic activity, the last policy of the year on December 13 and 14, the one-year anniversary of the first rate hike of this cycle, may be the first and only Fed rate increase of 2016.

MARKETS: As U.S. indexes flirted with all-time record levels, the real action was in the bond market. The yield of the 10-year U.S. treasury tumbled to 1.639%, the lowest close since May 2013. Additionally, yields of comparable bonds in Germany and Japan, fell to all time lows, as investors bet on the continuation of sagging growth and low inflation and found solace in the overall safety of the bond market.

• DJIA: 17,865 up 0.3% on week, up 2.5% YTD
• S&P 500: 2096 down 0.2% on week, up 2.6% YTD
• NASDAQ: 4894 down 1% on week, down 2.3% YTD
• Russell 2000: 1164, flat on week, up 2.5% YTD
• 10-Year Treasury yield: 1.639% (from 1.7% a week ago)
• July Crude: $49.07, up 0.9% on week
• August Gold: $ 1,275.90, up 2.7% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.38 (from $2.35 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 6/13:

Tues 6/14:

FOMC Meeting Begins

6:00 NFIB Small Business Optimism

8:30 Retail Sales

8:30 Import/Export Prices

10:00 Business Inventories

Weds 6/15:

8:30 PPI

8:30 Empire State Mfg Survey

9:15 Industrial Production

2:00 FOMC Decision

2:00 FOMC Economic Projections

2:30 Janet Yellen Press Conference

Thursday 6/16:

8:30 CPI

8:30 Philly Fed Business Outlook

10:00 Housing Market Index

Friday 6/17:

8:30 Housing Starts

#271 Will the Market Crash if Trump is Elected?

Investors spend a lot of time worrying about the market implications of the political season. Guest Taylor Tepper, who is a writer at Money, says that's a mistake. Despite all of the worries about a Trump presidency, Taylor says that the stock market will NOT crash if Donald Trump were elected president. That's just one of the topics we covered in a great conversation that ranged from market implications of elections to the national debt, to a lightning round on how to reform the U.S. tax code.

• Download the podcast on iTunes
• Download the podcast on feedburner
• Download this week's show (MP3)

I met Taylor through my work at Money, where we have shot some great videos, including this one on the Department of Labor Fiduciary rule, this one about working in retirement and the one about bonds can be riskier than you think, which is when I discovered that Taylor likes this money and investing stuff as much as I do!

Here are Taylor's two recent articles that we reference during our interview:

"No, the Stock Market Won’t Crash if Trump Is Elected President"

"5 Things Most People Don't Understand about the National Debt" 

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Ready, Set, (Fed) Hike!

“I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” - Federal Reserve Chair Janet Yellen, July 2015

This week, the central bank will do something that it has not done in over nine years: raise short-term interest rates. With the economy growing at a decent, though not great 2.25 percent annualized pace, 2015 monthly job creation averaging 210,000 and unemployment sitting at a seven-year low of 5 percent, Yellen and her cohorts have reiterated that now is the time to normalize policy.

This will be the first of many Fed actions that will eventually return rates to somewhere in the vicinity of 3.5 percent. How quickly they get there is up for discussion. Today the bond futures market anticipates that it will take around three years, but Yellen has said that the future path of interest rates will be entirely data dependent. If inflation rears its head, hikes may be quicker than the expected pace of every other meeting for the next three years. If the economy stalls, the central bank could pull back and skip a meeting.

Considering that it rates have been sitting at zero for seven years, it is helpful to review where we were then and where we are now. Though Americans may complain about slow growth, how quickly we forget what rotten looks like.

December 2008:

• Unemployment Rate: 7.2% (rate would top out at 10% in 2010)
• Job Loss (Dec): -681,000
• Q4 GDP: -8.2%
• S&P 500 12/12/08: 879

December 2015:

• Unemployment Rate: 5%
• Job Gain (Nov): +211,000
• Q4 GDP (est): +2.2%
• S&P 500 12/11/15: 2012

HOW WILL THE FED’S ACTIONS IMPACT INVESTORS?

Another big difference between where we are today versus seven years ago is that the Fed will be increasing rates with a balance sheet that has more than quadrupled through three rounds of bond buying (quantitative easing). How various markets will react to the first hike is unknown, because of the very fact that we are entering unchartered and choppy water.

Stocks: Typically, stock markets have dipped after the first rate increase, but usually regain their upward momentum, as long as the rate increase is in response to stronger economic activity. Stocks usually top out after the final increase. The last tightening cycle began with interest rates at 1 percent in June 2004 and ended with rates at 5.25 percent two years later. The stock market peaked in October 2007 and you know what happened after that!

Emerging markets are already feeling the effects, as investors exit risky bets in once high-flying markets like Southeast Asia, Brazil or Turkey. At the same time, US stocks are feeling the weight of sliding corporate profits. And while continued improvements in the economy and the slow pace of rate hikes could help equities regain more solid footing, many investors have forgotten how low interest rates made their stocks look attractive, relative to bonds.

Bonds: Billions of dollars have flowed into global bond markets over the past seven years, as nervous investors sought the safety of fixed income. Many investors are now fearful that rising interest rates will destroy the value of their bond positions. While it is true that as interest rates increase, prices on bonds that have already been issued, drops, that is not a good reason to abandon the asset class.

For most investors who own individual bonds, they will hold on until the bonds mature and then purchase new issues at cheaper prices/higher rates. For those who own bond mutual funds, they will reinvest dividends at lower prices and as the bonds in the portfolio mature, the managers will reinvest in new, cheaper issues with higher interest rates. In other words, being a long term investor should help you weather rising interest rates, though you may want to consider lowering your duration, using corporate bonds and keeping extra cash on hand. (For more on bonds, check out this post.)

HOW WILL THE FED’S ACTIONS IMPACT CONSUMERS?

In the seven years since financial crisis, companies, governments and consumers have gotten used to ultra-low interest rates. Here’s how the change in policy could impact you:

Savers: Any increase in the Fed Funds rate will help nudge up rates on savings accounts, so savers will finally be rewarded. That said, rates will still be low and the likely slow pace of increases will mean that savers’ suffering is not likely to end any time soon.

Borrowers: While rates for mortgages key off the 10-year government bond, adjustable rates are linked to shorter-term rates, which means that consumers should be careful about assuming these loans and also should consider locking in a fixed rate now. Additionally, as rates increase, the availability of 0 percent credit card and auto loans could diminish.

MARKETS: Oil, oil everywhere…and nobody wants to stop producing. Crude oil saw its worse week of the year, as evidence continues to mount that supplies are expanding amid withering demand.

• DJIA: 17,265 down 3.3% on week, down 3.2% YTD
• S&P 500: 2,012 down 3.8% on week, down 2.3% YTD
• NASDAQ: 4,933 down 4.1% on week, up 4.2% YTD
• Russell 2000: 1123, down 5% on week, down 6.7% YTD
• 10-Year Treasury yield: 2.14% (from 2.28% a week ago)
• Jan Crude: $35.62, down 10.9% on week
• Feb Gold: $1,075.70, down 0.8% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.01 (from $2.04 wk ago, $2.60 a year ago)

THE WEEK AHEAD: All Fed, all the time…

Mon 12/14:

Tues 12/15:

Fed begins two-day policy meeting

8:30 CPI

8:30 Empire State Manufacturing Index

10:00 Housing Market Index

Weds 12/16:

8:30 Housing Starts

9:15 Industrial Production

2:00 Fed rate decision/Economic projections

2:30 Yellen Presser

Thursday 12/17:

8:30 Philadelphia Fed Survey

Friday 12/18:

Back to School for Your Money: Bonds

Now that the kids are back to school, it’s time to hit the books for you and your money, starting with one of the most misunderstood asset classes: BONDS. Companies have two basic ways to finance their operations: through stock and through bonds. When you purchase stock (“shares” or “equity”), it represents ownership of a publicly traded company. As a common stock holder, you get a piece of what the company owns (assets) and what it owes (liabilities). You are also entitled to voting rights and dividends, which are the portion of a company's profits it distributes to its shareholders. Stock prices move based on supply and demand: if more people think the company will deliver future financial results, they will buy it and the stock will rise.

When you buy a bond, you are actually lending money to an entity -- the US or a foreign government, a state, a municipality or a company -- for a set period of time — from 30 days to 30 years — at a fixed rate of interest (the term “fixed income” is often used to describe the asset class of bonds.) At the end of the term, the borrower repays the obligation in full.

Bond prices fluctuate based on the general direction of interest rates. Here’s how it works: if you own a 10-year US government bond that is paying 5 percent, it will be worth more now, when new bonds issued by Uncle Sam are only paying a little more than percent. Conversely, if your bond is paying 2 percent and your friend can purchase a new bond paying 5 percent, nobody will be interested in your bond and the price will fall. That’s why bond prices move in the opposite direction of prevailing rates, regardless of the bond type. So, if you hear that interest rates are on the rise, you can count on your individual bond or bond mutual fund dropping in value.

Although often hailed as “safe,” bond investors face a number of risks, in addition to the interest rate risk described above. One is ­credit risk, which is the risk of default or that the entity does not pay you back. That is a pretty low risk if the entity is the US government, but can be a high one if it’s a company or town that is in trouble. Another risk is inflation. Even if the bonds are paid in full, the promised rate of interest can turn out to be worth less over time due to inflation, which eats into the fixed stream of payments.

Because bonds deliver a consistent stream of income, many investors view them as the perfect retirement vehicle. But as mentioned above, bond prices can fluctuate. The worst calendar year for the broad bond market was 1994, when returns were -2.9 percent due to an unexpected upward shift in interest rates (prices dropped more, but the interest from bonds helped defray some of those losses). So you CAN lose money in the bond market, though the magnitude of the fluctuations tends to be smaller than those in stocks and other riskier asset classes.

The magnitude of a bond loss is partially tied to the duration of the holding. Duration risk measures the sensitivity of a bond’s price to a one percent change in interest rates. The higher a bond’s (or a bond fund’s) duration, the greater its sensitivity to interest rates changes. This means fluctuations in price, whether positive or negative, will be more pronounced. Short-term bonds generally have shorter durations and are less sensitive to movements in interest rates than longer-term bonds. The reason is that bonds with longer maturities are locked in at a lower rate for a longer period of time.

For those of you who own individual bonds, the price fluctuations that occur before your bonds reach maturity may be unnerving, but if you hold them to maturity, you can expect to receive the face value of the bond. If you own a bond fund, it may be scary to see the net asset value (NAV) of the fund drop when rates increase. To soothe you a bit, remember that when NAV falls, the bonds within the fund should continue to make the stated interest payments. As the bonds within the fund mature or are sold, they can be replaced with higher-yielding bonds, which could create more income for you in the future. Additionally, if you are reinvesting interest and dividends back into the fund, you may benefit from purchasing shares at lower prices.

To help protect your portfolio against the eventual rise in interest rates, you may be tempted to sell all of your bonds. But of course that would be market timing and you are not going to fall for that, are you? Here are alternatives to a wholesale dismissal of the fixed income asset class:

Lower your duration: This can be as easy as moving from a longer-term bond into a shorter one. Of course, when you go shorter, you will give up yield. It may be worth it for you to make a little less current income in exchange for diminished volatility in your portfolio.

Use corporate bonds: Corporate bonds are less sensitive to interest-rate risk than government bonds. This does not mean that corporate bonds will avoid losses in a rising interest rate environment, but the declines are usually less than those for Treasuries.

Explore floating rate notes: Floating rate loan funds invest in non-investment-grade bank loans whose coupons "float" based on the prevailing interest rate market, which allows them to reduce duration risk.

Keep extra cash on hand: Cash, the ultimate fixed asset, can provide you with a unique opportunity in a rising interest rate market: the ability to purchase higher yielding securities on your own timetable.