Interest rates will remain lower and for longer than most expect. That is the takeaway from Janet Yellen’s recent Post-FOMC (Federal Open Monetary Committee) news conference. The implication for investors, especially those seeking income, suggests a lower allocation in government and investment grade corporate bonds, and a higher allocation in income-producing alternatives.
Income-producing alternatives include dividend growth stocks, high-yield bonds, real estate, and oil pipelines (Master Limited Partnerships). While each of these asset classes offer higher yields, the associated risk is different and possibly greater than that of government and investment grade bonds.
In our opinion, until there is fiscal reform such as reduced regulations and tax reform, the very slow growth of the economy will continue. However, the risk of a U.S. recession remains low. One year ago in an op-ed for the Wall Street Journal, John Taylor, a Stanford Economist, concluded with this: “The U.S. economy is not a turtle, but a caged eagle ready to soar if released from the captivity of bad government policy. By putting the right policies in place – particularly personal and business tax reform with marginal rate cuts – the U.S. can turn the economy around quickly.” We couldn’t agree more. Until then, “lower for longer.”