The Fed Has Spoken

At last week’s annual Jackson Hole Economic Symposium—a conference where central bankers, academics, and finance ministers from around the world gather for an open discussion of important economic issues—remarks made by Fed Chairman Jerome Powell on Friday served as a reality check for the market. Lasting just eight minutes, Chair Powell’s comments were surprisingly short, and his speech’s brevity seemed to convey as much meaning as his words by emphasizing his resolute stance. After a rough start to the year, markets had been trending higher since mid-June under the notion the Fed may pivot to a more relaxed policy in the presence of early indications of slowing inflation. Powell made clear the Fed would continue using the tools at its disposal to bring demand down to better align with supply. The intent is to keep longer-term inflation expectations anchored to prevent excessive inflation from becoming entrenched. The message was they would take the Fed Funds rate above the long-term neutral point and leave it there until they “are confident the job is done,” even if it meant bringing “some pain to households and businesses.”

As interest rates rise, economic growth slows, because businesses must be more selective in their use of credit for expansion, just as households must exercise more restraint in the use of credit for consumption. With Chair Powell having effectively ruled out a near-term pause—let alone a reversal of policy tightening—markets reacted by giving up about 40% of the gains achieved since the mid-June low. Recurring headlines in the financial news relate to marked disparities in the forecasts of major Wall Street firms. This lack of consensus indicates uncertainty, and uncertainty leads to market volatility, suggesting bouts of volatility are likely to continue for now. During such times, a question we frequently get from clients is whether we should be doing anything different. The economy and the markets are cyclical, and we account for this when helping you set your investment objective. We know recessions, bear markets and unforeseen external shocks will occur, though no one can know precisely when, how severe they will be or how long they will last. It would be counterproductive for us to issue a blanket recommendation for everyone to adjust their target proportions of stocks, bonds, and cash in their portfolio every time the market hits a rough patch. Being overly reactive to the news of the day is how novice investors often manage to greatly underperform the market. As discretionary managers, we make adjustments on behalf of our clients that reflect our outlook, such as shortening durations of fixed income holdings to make them less vulnerable to rising interest rates and favoring stocks in companies which are, in our opinion, better positioned to succeed in the economic conditions we see ahead. Changing your investment objective is most appropriate when your circumstances or goals have materially changed, and your portfolio’s allocation needs to be realigned to reflect those changes.

Market volatility can be uncomfortable, and we may continue to face some challenges as the effects of pandemic-related stimulus wear off. Still, we remain optimistic about the longer-term, and look forward to opportunities to capitalize on the discounted valuations that volatility brings, just as we have been doing over the last few months.