Mixed Signals & Interest Rates

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To say that the investing climate over the last four months has been challenging, would be an understatement. The volatility that exploded onto the scene from October 1 through December 24 was more than a little concerning. We saw the blended averages go from solidly positive on the year as of the end of September, to losing 20% from that recent high as measured by the S&P Index 500.* What is most unique about this sell-off, is that I could argue that it was brought on by stronger than expected economic data and jobs reports.

According to the Bureau of Labor Statistics, we had 4.2% economic growth in the second quarter of 2018, and followed that up with 3.5% growth in the third. We have yet to hear how the fourth quarter performed, due to the government shutdown. Although I don’t think it will be as robust as the first or second quarters, I think the number will remain very positive. We haven’t had 4.2% economic growth since 1997 – that was 21 years ago! With 3.9% unemployment, the work environment is the best that it’s been in decades.

So, why all the volatility and decline in stock prices? I point clients and readers to the Federal Reserve and their mixed signals regarding rising interest rates. Since 2008, the economy had been growing at a very slow rate. This encouraged the Federal Reserve to lower the rate to 0%, and they have kept it at that level or just slightly higher to encourage easier business conditions. All through the last decade, the stock market got used to the fact that bad economic data was “good news” because interest rates would stay low. This is a slightly perverted view of the economy, given that historically, and by definition, good economic news has always been viewed as “good news.” Well, now we find ourselves in a pickle. The economy is great, but now, that means that interest rates should go up to help balance out the risks of rising wages and inflationary pressures, as too much money chases around not enough goods. Investors have gotten used to the low interest rate policy that the Fed implemented when trying to nurse our economy back to health. We could equate it to someone who is addicted to a substance, having that substance being taken away from them. This action is typically accompanied by withdrawal symptoms and fits of rage. This, in my opinion, is exactly what the stock market did in the fourth quarter, when Fed Chairman, Jerome Powell, indicated that he was looking to raise interest rates four times in the next nine months! Why was Chairman Powell going to raise rates? Because the economy was doing so well and inflation was starting to set in. Then, our addict (the stock market) went into fits of rage, and became very volatile.

In my opinion, the Fed Chairman was right in his assessment, and interest rates need to go higher. As the economic doctor, he decided that was the best route to keeping our patient in good order. Here is where the mixed signals have come from. The first time that Chairman Powell had an opportunity to actually raise the interest rates in January, like he had said he was going to, he decided to hold off. This is where the Fed is now talking out of both sides of its mouth, trying to do what is right AND keep the stock market happy. This is a dangerous game, and the Fed needs to ensure that their decision-making is independent of both stock market fluctuations, as well as President Trump’s constant insulting rhetoric.

When it comes to the economy, I believe that we still have much brighter days ahead. Eventually, our markets will return to more normal conditions where good news is again viewed as “good news.” Until then, I encourage investors to develop a plan and stick to it. Tough markets don’t last, but tough investors do.


800.338.4586 olvinvest.com The Durant 607 E. 2nd Ave., Suite 100 Flint, MI 48502 jlagore@olvinvest.com
Securities offered through Sigma Financial Corporation, member FINRA/SIPC.
Investment advisory services offered through SPC, a registered investment advisor.
OLV Investment Group is independent of Sigma Financial Corporation and SPC. *It is not possible to invest directly into an index. Past performance is no guarantee of future investment performance. This article is for informational purposes only and should not be construed as investment advice.

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