by Connor Darrell, Head of Investments
Equity markets ended a bumpy week relatively flat after a strong rally on Tuesday was offset by Thursday’s selloff. A variety of geopolitical concerns – including the disappearance of journalist Jamal Khashoggi while in Saudi custody – weighed on investors’ minds. Bonds trended lower after the release of the minutes from the Federal Reserve’s September meeting, which suggested that policymakers expect to continue raising interest rates and would consider pushing them into “restrictive” territory in an effort to keep the economy from overheating.

The Fed Isn’t Going “Loco”
President Trump has made it no secret that he disapproves of the Federal Reserve’s decision to carry on with a steady pace of interest rate increases. It’s not surprising that a sitting president, who’s legacy is likely to be closely tied to the performance of the economy under his watch, would be opposed to monetary policy decisions designed to slow the growth of the U.S. economy. What is surprising however, is that he would express that opinion so publicly. In an interview this month, the President stated that he believes the Fed is “going loco” and is “out of control”.

There are a couple of things to keep in mind about the Fed’s job. The Fed’s primary function is to keep the economy from reaching extremes. That involves stepping in to reduce the pain during recession as well as keeping the economy from overheating during periods of expansion. The latter task is arguably even more important, because the worst economic periods throughout history have all been preceded by excessive risk taking and asset bubbles, which typically form during the latter stages of a bull market. Looking through the lens of history, the current interest rate environment can still be reasonably considered to be accommodative for economic growth, and the Fed will likely continue its pace of gradual rate hikes. All of this should be well understood by financial markets and should not lead to a sharp fall in stock or bond prices on its own.

A Word on Market Volatility

by Connor Darrell, Head of Investments
It was a difficult few days on Wall Street, and many investors have begun to wonder whether it is time to worry. Volatility has a way of surfacing just when investors are starting to feel comfortable, and it can make sticking to long-term plans exceptionally difficult. It seems like ages ago now, but many of us were in this same position of pondering the death of the bull market as recently as February of this year. But following the market sell-off in early 2018, markets were able to find their footing and eventually (briefly) regain new highs.

The market’s ascent occurred despite a difficult backdrop of escalating trade tensions, rising interest rates, and uncertainty regarding the future of monetary policy and the balance of power in Washington. The U.S. equity market was able to brush these things aside because companies were reporting strong earnings growth, the unemployment rate was near record low levels, and U.S. economic growth was accelerating. All these things (both the favorable and the unfavorable) are still true today. As is typical during long bull runs, the action we have observed over the past few trading days suggests that markets (potentially spooked by a modest but sudden jump in bond yields that occurred last week) are simply re-evaluating the risks we delineated above and their potential impacts on the forward outlook.

Ultimately, we are of the belief that the list of factors supporting markets far outweighs the list of potential concerns at this time, and we anticipate that markets will eventually arrive at the following conclusions:

• The U.S. economy remains healthy (this is supported by the myriad of economic data we track on a regular basis and reiterated by comments made by Fed Chairman Jerome Powell just last week).
• Monetary policy, while certainly moving in a restrictive direction, remains accommodative relative to history.
• Interest rates are creeping up for the right reasons (healthy economic growth).

We anticipate that this bout of volatility will play out much like the last one. Our plan is to “stay the course” and believe clients will be well served to trust in their long-term financial plan. As human beings, we tend to focus on the short term. This is a natural inclination rooted in the “fight or flight” instincts that our ancestors relied upon for survival. The key to successful investing is to put these instincts aside and focus on the long term.