3. Volatile Bond Market in 2013, Volatile Stock Market in 2014. The January 2014 sell-off for the S&P 500 was more volatile than anything stock investors had to deal with in the entire 12 months that had preceded it. Commodity price inflation, weak macroeconomic data, geopolitical risk in Ukraine as well as murky forward guidance by the Federal Reserve have collectively toyed with stock investor confidence over the last three months. In contrast, bond prices have actually gained ground on worries that the muddle-through U.S. economy may not be capable of handling less stimulus from the Fed.
So what should investors make of an economy that is neither growing considerably nor weakening substantially? After all, the dynamic certainly benefited those who overweighted domestic equities in 2012 and 2013. Today, though, the Fed’s reduction in the levels of quantitative easing provide an easy excuse for profit-taking. The last few days have witnessed enormous selling pressure in biotech, social networking, cloud computing and alternative energy.
In contrast, the stability of the 10-year yield is providing comfort to income-oriented investors. Not only has the 10-year jockeyed between 2.6% and 2.85% for the better part of two months, but the tight trading range encourages muni advocates to acquire higher-yielding possibilities. I like the short-term high-yielding muni space via Market Vectors Short Term High Yield Muni ETGF (SHYD). More aggressive folks might gravitate toward the SPDR S&P High Yield Muni Bond Index ETF (HYMB).