Most of the information that the Fed is using to make decisions about rate changes are lagging economic indicators.
As far as Jerome Powell and the Fed seem to be concerned, we’re living in a world where up is down, down is up, good news is bad news, and bad news is great. It’s Bizzaro World!
The economy continues to be a difficult one for investors, as the Fed remains insistent upon increasing interest rates, at any cost. While many, including us, have been sounding the alarm about inflation since the stimulus spending spree of ’20 and ’21, the Fed only acknowledged it may be an issue earlier this year.
As a result, the Fed has been compensating for being asleep at the wheel through a series of massive and rapid interest rate hikes in an attempt to bring inflation back to its target of 2%. Considering inflation has averaged 3.3% since 1914, a 2% target becomes an onerous demand to place on the economy, especially given all of the other headwinds.
This ham-handed strategy has meant that the Fed is reading otherwise positive metrics as harbingers of doom. For example, the economy is currently at full employment, with new jobs in manufacturing, hospitality, and other sectors being created throughout the year. This otherwise good news is being interpreted by the fed as a sign that the economy is not slowing down.
Estimates are that GDP for the third quarter will be positive by as much as 3% annualized. After two quarters of negative growth, one can only wonder at the Fed’s reaction to economic expansion.
Most of the information that the Fed is using to make decisions about rate changes are lagging economic indicators. Consequently, the Fed won’t know it’s gone too far, until it’s gone too far. This compounds the difficulty around reining in inflation without sending the economy into a recession.
To make matters worse, the Fed needlessly unsettles markets by telegraphing today what it thinks it might do in the future, based on information from the past. It’s bizarre.
Year to date, US indices are down as much as 32% (as of Oct 10).
So, where do we go from here?
1. We expect the Fed to continue raising interest rates, although any slowdown in the pace of these increases should be positive for the markets.
2. While rates have increased, it’s important to keep in mind that they are still not historically high.
3. The dollar continues to be very strong, which makes the cost of commodities, like grain and oil, which are priced in dollars on the world market, relatively less expensive to US consumers. Conversely this hurts our European friends.
4. Unemployment rates continue to be extremely low, signaling full employment. Recessions do not typically happen during these periods. We, and the Fed, will continue to monitor this metric.
5. We fully expect markets to continue to be volatile during the remainder of the year as economic and geopolitical factors remain at the forefront.
6. According to Reuters, fund companies are sitting on a mountain of cash. In fact, they are holding more cash than they’ve held in any year since 2001, as fund managers seek opportunities. We continue to watch this as an indication of what the “smart money” is doing.
In light of economic and geopolitical headwinds, tactically overweighting cash and cash equivalents while you, too, seek opportunities, may make a lot of sense depending on your circumstances. As always, work closely with with your Certified Financial Planner® Professional to help ensure that your portfolio accurately reflects your individual needs, as well as the ever-changing market landscape.
Stephen Kyne CFP® is a Partner at Sterling Manor Financial in Saratoga Springs, and Rhinebeck.Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, or Cadaret Grant & Co., Inc, SEC registered investment advisors. Sterling Manor Financial and Cadaret, Grant are separate entities.
