Federal Reserve Mania
The markets are being driven by expectations, both positive and negative, as to what the Federal Reserve will do at its next meeting. Market psychology matters.
Any sign the Federal Reserve will moderate their interest rate policy to decrease the slope of rate increases is seen as a positive by the market. Any hot economic data showing the economy is still running strong is perceived as a negative.
Too often we think markets are purely rational. The perception that euphoria and fear do not matter is a mistake; it clearly does as evidenced by short-term market movements.
It is our view that equity markets will begin to recover once we have evidence that inflation is slowing. We are beginning to see signs of that now (though there are certainly mixed messages regarding the economy’s health from the various data points).
We believe that if the economy lurches towards recession, there's a reasonable chance that the Federal Reserve will stop raising rates (or even cut rates!). This is merely an educated guess, but we think this is the likely path.
We continue to invest in shorter duration fixed income as a buffer against interest rate increases. Our equity positions are managed to provide long-term growth despite short-term volatility. We continue to make adjustments there as well.
A recent CNBC article highlighted the current state of interest rate policy. An excerpt is provided below:
“Investors are watching for fresh economic data ahead of next week’s Federal Reserve policy meeting. Following a speech last week by Fed Chairman Jerome Powell, markets largely expect the central bank will approve a 0.5 percentage point interest rate increase. That would mark a step down from a series of four straight 0.75 percentage point hikes.
However, Powell also said the “terminal rate,” or point where the Fed stops raising, likely “will need to be somewhat higher” than indicated at the September meeting. That could mean a fed funds rate that ends up in excess of 5%, from its current target range of 3.75%-4%.
Friday’s nonfarm payrolls report added to the market’s Fed anxiety as average hourly earnings rose above expectations. Wage pressures on inflation could force the Fed into an even more aggressive stance.”
Lastly, I also wanted to take a moment to congratulate George Chin for a decades-long career at Destination Wealth Management. He has been President of the firm and headed up the Advisor team for many years and has decided to transition towards retirement. His new title will be President Emeritus. We wish him the best. We will continue to have a relationship with George next year and will make sure the transition is a smooth one.