BE EVER VIGILANT
Today, I am attending a retreat at Villa Maria Guadalupe, the retreat house run by the Sisters of Life. I am with our Senior Leadership Team for two days of prayer and contemplation. As we broke for lunch, I was finally able to check my email and the markets. I knew that inflation had come in flat with last month, but I was in group discussions when the market opened. As of 1:30 pm ET on November 14th, the S&P 500 is up over 1.9% and the 10-year Treasury is down 18 basis points to a yield of 4.45[1]%.
I saw a number of headlines indicating that investors should start to consider how high the markets may rise. Keep very focused that this move today is largely a relief rally due to a belief that maybe, just maybe, the Fed is done with hiking rates in the current cycle. It was not a week ago that Federal Reserve Chairman, Jay Powell, stated that he remains data dependent and will continue to increase the Fed Funds rate to thwart inflation.
In my view, Powell knows that increasing rates will ultimately tamp down inflation, but he appears to want to be vigilant, so we do not end up with the environment that Paul Volker battled in the early 1980’s. The Fed appears ready to allow unemployment to increase in order to bring inflation under control.
The inspiration for today’s note is tied to two things. First, the sharp move today causes me to consider patience with respect to trying to forecast an unbridled rally. Could it happen? Sure it can, however, employment and other market factors are showing some stress and this could place restraint on any new rally. The second topic that came to mind was in response to some recent reading on personal finance. Regular readers know that I am acutely interested in behavioral finance. An article I read last week was focused on people considering the market activity of 2022 and 2023. In these two years, interest rates have been in an upward trend and that trend has hurt holders of bond mutual funds and bond ETFs. The author was providing a strong measure of caution to not capitulate on a long-term plan simply because a two-year period was not favorable to an asset allocation structure that holds bonds. We continue to espouse a long-term investment strategy and a constant examination of goals and time horizons to make sure your asset allocation structure meets your long-term goals.
I am not changing my mind about being a market-timer. I remain decidedly against market timing, but when you see large shifts in bond rates or a major move in the stock market, our human reaction of having a fear of missing out might spur activity. We think that today shows what we have been expecting; as a result of higher borrowing rates, the economy would slow, unemployment would be on a rising trajectory, and we could see an economic slowdown. After today, we believe this is all still in place. Be ever vigilant.
