If risk-free returns on CDs have been returning performance equivalent to risk-laden returns on S&P500, the question some investors are asking themselves is "Why take the risk?"
That’s the issue Justin Lahart explores (inadvertantly) when exploring the issue of how low rates actually are:
"Even though the Federal Reserve has been raising rates since June 2004,
they’re low historically. Over the past 50 years, the fed-funds rate
(the main overnight rate the Fed controls) has averaged 5.75%. Today’s
[4.5%] hardly seems onerous . . .
Ed Hyman, chief economist at research firm ISI Group, points out that those low, long-term yields are also a signal that returns on other investments are expected to be low.
Consider stocks. Last year, the S&P 500 index had a total return (including dividends) of 4.9%. Meantime, the average rate on a six-month certificate of deposit was 4.6% in December. They’re so close, you can imagine investors socking a bit more money in (safer) CDs and a bit less in (riskier) stocks.
These low expected returns have ramifications on economic prospects. It gives companies less reason to spend money on the equipment or new hires to expand. It gives venture capitalists less reason to fund budding businesses. In short, it discourages investment, and makes economic growth harder to come by as a result.
Today’s low short-term rates may be plenty high."
Interesting stuff . . .
AHEAD OF THE TAPE
By JUSTIN LAHART
January 11, 2006; Page C1
I do Larry Kudlow’s show whenever he asks, and while I am certainly not the
political wonk he is, I do keep track of the budget process. I want to see how the deficit is shrinking or growing, what changes to the tax code might be coming, and which sectors of the economy are getting a spending boost from Uncle Sam.
That’s a lot of stuff to watch — Fortunately, there’s a terrific set of charts today via the online WSJ: Crunching the Numbers (click each for larger graphics).
Gainers and Losers:
A broader view of what’s growing and shrinking in Bush’s 2007 proposal, in budgetary authority
Sources: Office of Management and Budget, AP
*Includes miscellaneous, undistributed offsetting receipts
Receipts and Outlays
A look at how the federal government is counting on bringing in revenue, and how it plans to spend it in fiscal 2007. All figures in billions unless noted.
Did you know that thee Estat Tax weas such a modest slice?