After a period of relative calm in the markets, volatility returned with a flourish last week. There was a sizable downturn on Friday, followed by a rebound on Monday, and another leg down on Tuesday. After an abnormally quiet summer, the last 3 days have brought big moves of over 1% in both directions.
The proximate cause of this manic activity appears to be that the Federal Reserve is considering raising the Fed funds rate from 0.25% to 0.50%. If that seems like little reason to panic, you are right! When the Fed finally decides to raise interest rates, it could be the most “telegraphed” policy change in financial history. We have been in the midst of a near zero interest rate policy since 2009, and the hemming and hawing about when to raise rates has been going on for years.
The “lower for longer” policy approach by the Federal Reserve and global central banks has led many to believe that rates will stay low far into the future. This has driven yield oriented investors into lower quality bonds and “bond-like” stocks with higher dividends, such as utilities. However, these high yielding bonds and stocks are very sensitive to rising interest rates. Thus, when interest rates rise as they did on Friday, there is a rush for the exits, resulting in lower prices and high volatility as speculative investors exit their positions.
With all of the noise and uncertainty surrounding potential Fed activity, you might ask “what should I be doing?” If you are a speculator, timing is everything. Making short-term bets on policy changes and the market’s reaction to them requires almost perfect execution and timing. Few will get it right, most will not. If you are a long-term investor, the answer is much easier because time is on your side. Adhere to your strategy and gather long-term returns as the market reacts to short-term policy changes.
We believe that the ongoing economic expansion will ultimately lead to higher interest rates; it’s only a matter of time. The key questions will be “when?” and by “how much?” As the Fed slowly shifts gears and gently begins to raise interest rates, the more important and welcome message is that things are finally getting back to normal. Long-term investors needn’t worry about these short-term fits of volatility. Let’s leave that to the speculators.
If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.
Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.