Our take on issues impacting financial markets
We thought it would be beneficial for the readers to change up the column a bit to address more of the broader issues impacting the financial markets and investors. With the format below, it is possible to provide information and insight on a more timely fashion with the intent of helping you reach more informed decisions regarding your financial future. That said, we welcome your comments at www.faganasset.com.
The Federal Reserve released its minutes taken during their meeting on September 19-20 show a committee that is likely to raise interest rates when it reconvenes during December. The minutes noted that “consistent with the expectation that a gradual rise in the Federal funds rate would be appropriate, many participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged.”
Despite the apparent intent of the Fed to raise rates in December, members appeared somewhat concerned over the lack of short-term inflation. “Market participants were attentive to the Committee’s assessment of recent below-expectations inflation data and the acknowledgement in the July FOMC minutes that inflation might continue to run below the Committee’s two percent objective longer than anticipated.”
In our opinion the Fed is in somewhat of a pickle (technical financial term) as their dual mandate is to execute monetary policy that promotes maximum sustainable employment within a stable interest rate environment. To the Fed that means real (after inflation) growth in Gross Domestic Product (GDP) and inflation of two percent. The concern within the current economy is in regards to inflation as advances in technology as well as the Amazon effect has resulted in very little inflation – inflation that will generate demand. Should the Fed raise the short-term federal funds rate and if the market driven longer-term rates remain unchanged there exists the danger of an inverted yield curve in which short-term rates are higher than long-term rates. Historically, that signals a recession.
To spot signs of trouble we recommend investors keep an eye on the yield of the ten-year U.S. Treasury note as compared to that of the two-year. Currently, the yields are 2.35% and 1.51%, respectively resulting in a spread of 0.84%. Should these two yields fall or the spread between the two narrow precipitously this would be a warning sign. That said, this is not our baseline case. We believe interest rates will head higher as the economy gains momentum and the spread between the ten- and twoyear notes will widen.
After reporting earnings this past Thursday, Jamie Dimon, the CEO of the largest bank of in the United States, JP Morgan observed that “the global economy continues to do well and the U.S. consumer remains healthy with solid wage growth.” In our opinion, Mr. Dimon is one of our country’s best CEOs and somebody to whose opinion warrants listening. If correct, this bodes well for equities and neutral to bearish for bonds.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.