022. Overcoming Excessive Investments of Over-priced Equities

The investment committee of S&P estimates that roughly $1.3 trillion in retiree assets are currently misallocated into equities based on the historic 16-year average price-to-earnings ratio for the S&P 500. This has resulted in stock price inflation that has kept equity valuations aloft even as quarterly corporate earnings results have begun to show signs of weakness.

As these misallocated investments stream back into the fixed-income markets once the Fed starts raising rates, the supply-demand imbalance will drive up prices and push down yields faster than the Fed can raise them. Essentially, every time the Fed introduces any additional yield into the marketplace, it will be immediately swallowed up by retiree (or near-retiree) investors who need to de-risk their portfolios.

Meanwhile, a steady exodus from equities  will cause valuations to fall more in line with fundamentals, which have not supported the high valuations we’ve seen over the past several years.

SOURCE: http://www.wsj.com/articles/how-the-fed-has-warped-the-401-k-1447718861

CONCLUSIONS: Retired seniors cannot make up for losses from the decreasing valuation of their investments from a rise in the interest rates by the Federal Reserve. The only solution is to shift into a more aggressive program of investing into sectors with superior returns, such as health, consumer cyclical and technology.