Interest Rates and The Fed
As expected, the Fed has announced its tenth rate hike in thirteen months. The numbers weren’t surprising, but the words they used were. Before, they were saying that they anticipated further tightening would be necessary, but now they’re saying that they are determining whether or not further rate hikes will be necessary. The market took that as the Fed is done raising rates, but what does that mean for returns? The data shows that there’s no longer an expectation for higher rates but a possibility of future rate cuts. Many historical reports show that when the Fed pauses or pivots, it’s positive. On average, returns after the last Fed rate hike and to the first rate cut, the market is higher by five percent. However, average is a loaded word in this case. The chart shown in this episode shows the market’s returns after the last Fed rate hike and before the first rate cut. One thing that stands out is that there is not a single data point that is anywhere close to where the average is. The average is in the middle at five percent. In 2006-2007, there was a 20% increase, but in 1974, 1980, 1981, and 1984, the market fell. This is a situation where average is like having one hand in the oven and the other hand in the freezer; on average, you feel great, but average isn’t what anyone’s experiencing. You’re either doing great with markets up, or markets are down; there is no in-between on these data points. What’s concerning is that our research indicates that the current environment is a lot more like 1974, 1980, and 1984. The difference is that back then when the Fed paused, they were still dealing with inflation due to external factors. Even though we are working towards correcting inflation, enemies have the ability to shock our economy and cause inflation to rise just like they have historically. We analyze historical and current data, not only looking at the numbers but also watching the words. How things are worded is significant, and all of these factors are why we’ve stayed defensive until some of this pans out.
The Debt Ceiling
One upcoming event that we are keeping an eye on is the conversation around the debt ceiling. We started watching this a couple of weeks ago when the House Republicans tried to pass something to get the negotiating started. With only a 50/50 shot of getting anything through, they were able to pass something by a mineral majority to start negotiations, which was an essential first step. Tomorrow, President Biden is meeting with House and Senate members to discuss the debt ceiling further. There will likely not be a deal for a few weeks; however, due to the recent tax revenue numbers, this debt ceiling date, originally expected to be August or September, is being pushed up into June. This gives them only a couple of weeks to discuss this. If the debt ceiling isn’t raised by the time the due date hits, there is no reason to panic. We have enough cash flow to pay interest payments on important things. You could see the volatility pick up as talks go on and as the due date approaches. One question that keeps coming up is how this be funded. The Treasury General Account program supports some markets with liquidity from their reserves. That liquidity must be replenished when the debt ceiling rises, but how will they do that? Typically, they take from bank reserves, but that is not an option because banks need to be in better standing to do that. Therefore, they will have to find other funding methods. It will be important to watch and see what words they use when they announce how and when they will do this. It will be imperative because it will lead us to what happens next for the market.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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