Similar to life here in paradise, there can be confusing signals as in the soaring prices of real estate and the question of whether to buy or sell; after all, it can’t be both. This type of confusion has spilled over into the financial markets as to what the market signals and headlines are telling us.
Recent headlines touch on the issue of the Fed and the direction of interest rates. Many investors feel the only direction for rates to go from here is up, right? As we continue to sit at record low levels, it is highly unlikely that rates will have any room to go down, regardless of economic strength. However, the confusion comes with recent commentary from Fed Chair Janet Yellen. Previously, the Fed made the case that they would raise rates slowly and systematically during fiscal year 2017. This announcement was to prevent any market jitters as the thought of rising rates generally have a negative impact on the stock market.
The confusing signal from the Fed now is regards to inflation. It seems that the possibility of slowing growth may be a double edge sword. According to an Associated Press report, the headline read: “Low inflation complicates Fed plans.” The basis of the report was simply that the Fed had planned on systematically raising rates this year based on the assumption that they can tame any fears of inflation while not disturbing the markets. Now, on the surface, halting rate increases may seem like good news. However the quandary here according to the AP report is; “The Fed typically doesn’t want to wait too long before raising rates for fear it would then have to increase rates faster if inflation accelerated.” Future accelerated rate increases versus slow and gradual increases changes everything; yes confusing signals.
Further compounding the confusion is that as rates have already begun to slowly tick up, a decrease in economic activity combined with a slowdown in consumer spending are both bad news for the markets. There are two scenarios playing out here; first is that rates at some point, if they continue to rise, may have a negative impact on the stock market. The second is that if the economy is not strong enough to stand on its own, which would be in line with the concept of the current situation whereby rate increases may slow or even discontinue, we may have a weaker than expected economy. At some point it will become the familiar “darned of you do and darned if you don’t” as far as the pace of interest rate increases. Yes, confusing signals indeed.
Further confusing is the recent USA Today article referring to the “Dangerous summer ahead.” Just as investors revel in this artificial and baseless Trump Rally, this article goes on to state; “Historically, August and September mark a turbulent period for Dow.” This is simply referencing the fact that historically, these late summer months often are the victim of low trading volume, or much lower activity on Wall Street. This makes the markets more susceptible to losses based on any negative news.
This relatively predictable phenomenon confuses investors who seem complacent with the current levels of the market while at the same time they are warned that there could be losses from this late summer slump. However, not mentioned in the piece was the fact that overheated markets, such as the one we are currently experiencing, often only need a small catalyst of any type to start a much overdue market correction. In other words, even a predictable time of volatility such as the late summer slump can be just enough to ignite a significant selloff on Wall Street.
The confusion on the pace of rate increases, the strength of the economy and short term market gyrations can generally put investors in a state of what is often referred to as “paralysis by analysis”. Implementing a truly diversified portfolio (See non stock holdings) including insured index strategies combined with the potential of managed futures can smooth out the ride and certainly lead to the life of a SWAN, Sleep Well At Night.
William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or WFHague@earthlink.net. The opinions and observations stated above are those of the columnist.