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Hold Down The Racket!

June 13, 2024 | Posted in: Insights, Investing

I have written many times about the pernicious impact on investment results of what I call “noise.” Blaring headlines, the pronouncements of pundits, and cocktail party braggadocio can lead to fear, greed, and ultimately, rash decisions to change investment strategy at what will often turn out to be just the wrong time. We are currently in the midst of a great example of Wall Street noise.

Using interest rate future contracts, one can identify investors’ collective view as to where interest rates will be at specific times in the future. Based on declining inflation in the latter part of 2023, investors entered 2024 expecting six or seven interest rate cuts during the year with the FED Funds rate ending at 3.5%, down from 5.5%. Equity investors were delighted with this scenario leading to a 10.5% return on the S&P 500 during the first quarter. Then, the FED announced it would postpone rate cuts until there was further evidence that sticky inflation was once again on a path to reach its target of 2%. Investor expectations immediately shifted to a single rate cut late in the year with the Fed Funds rate only declining to about 5%. Some economists actually predicted that cuts would not take place until sometime in 2025 meaning that the Funds rate would end 2024 unchanged. While the reaction to this less favorable outlook certainly could have been worse, the stock market basically moved sideways from the end of March onward. This week, modest improvements in the Consumer and Producer Price Indices were reported and sentiment has shifted yet again. The futures market is now estimating a 65% chance of a quarter point cut in September and an 80% chance of a similar cut in December pointing to the likelihood that we could end the year with the FED Funds rate at 4.75% or so. The stock market reacted favorably pushing the S&P Index close to its all-time high.

So, in just a six month period, we have experienced three material shifts in the interest rate outlook with accompanying changes in the tone and sentiment of the stock market. The key point is that investing on the basis of the short-term outlook is a terrible idea because sentiment is driven by emotion, subject to rapid change, and frequently just plain wrong. We have preached ad nauseum the virtue of developing and sticking to an investment plan and the recently volatility of economic expectations reinforces our view. One further confirmation is the fact that the classic 60% stock/ 40% bond portfolio has returned about 8% year to date which is in line with its long-term annual return. And, you could have achieved this salutary result while ignoring the stomach-turning roller coaster of financial headlines!