Investment Commentary: Why Look to the Fed and not a Bottle?
After eleven years of working in the financial services industry, I am still amazed at the power of the media, and, so called experts, on the psyche of investors. Fear is a powerful emotion and it is used by large corporations to their advantage, to push their agendas and to sell their products and even to sell their magazines, advertisements, books, and the like.
While people have emotions, the financial markets have no emotion. Markets drift along with no predictable direction, like a bottle in the ocean. As with the bottle in the ocean, it should not be a surprise when the financial markets suddenly change directions. For the bottle in the water, currents, eddies, waves, the tide, and even the alignment of the moon and stars all take part in producing changes in directions. Different but similar forces impact the financial markets. This analogy helps to keep the markets and market changes in context.It is our job as financial professionals to study and follow the ever changing markets with the aim of putting our clients in the most favorable position to take advantage of market changes — based on their individual and unique goals, risk tolerance, preferences, etc. Here are the issues:
There is no need to obsess or look to the Federal Reserve for direction. The odds weigh against the Federal Reserve providing a soft landing for the economy. The Fed has only managed this feat once since 1913 (in 1995) and they only did so by manipulating interest rates — rates which are currently at near historic lows.
The market data is mixed so it is hard to get a sense of direction, but there are two indicators that cannot be ignored. Interest rates and inflation are rising and that might not be a good thing if your portfolio is concentrated in the domestic equity market. Stagflation (inflation rises and the economy goes negative at the same time) is a real concern, especially for domestic equities, but it can and should be planned for.
There is one factor nobody is talking about, and that is the positive effects of supply side economics. Supply side economics is still an experiment, and keep in mind, it was instituted after a long period of stagflation in the 1970’s. Supply side economics is based on Adams Smith’s 1776 work entitled The Wealth of Nations
The idea is this; the more capital and resources available worldwide the better chance of steady growth at home (more opportunity to trickle down). President Regan successfully implemented a version of this idea, to stem stagflation, and it was termed raganomics. Here is a little perspective on the topic. While running against Reagan for the 1980 presidential nomination, George Bush derided reganomics as “voodoo economics.” President Ford and many economists thought the economy would collapse and were fervent critics of this policy. Times have changed and each successive administration since has employed a version of this strategy in an attempt to keep the economy from having to many peaks and valleys and is no longer called “voodoo economics.” Its net effect over the past 20+ years has been low inflation and steady growth. One cannot really argue with the results, and it could easily continue working; however, nothing works forever and time will be the true judge.
I will not make a prediction about the market but a balanced portfolio might be a prudent allocation for most people in this current economic cycle.
A message to my clients:
I am currently stress testing your portfolios and looking for profitable investments during a possible period of stagflation. I will be discussing my findings with you personally very soon. Remember the market must go up and down for your returns to compound and outpace inflation. Like the bottle in the ocean, we can rest assured that the markets will continue to change direction.
By: Jon Mitchell
Clarity Wealth Management
P.O. Box 77072
Fort Worth, Texas 76177
817-993-0649
