This Week in the Market
With Scott McCaghren and Tony LaPorta
The Federal Reserve certainly did not disappoint with yesterday’s fed funds rate adjustment by which the equity markets had previously priced in a 93% probability of a 25-basis point decrease. This has most seasoned market experts scratching their heads. Let us remember back to the last three major market scares that we have experienced over the past three decades. During the 1987 debacle, the average fed funds rate was roughly 6.50%; which dropped modestly heading into the next troubled time period. During the tech bubble of 2000, the average fed funds rate was roughly 6.50%; which dropped as low as 1.00%. During the infamous 2007/2008 financial crisis, the average fed funds rate was roughly 5.25%; before dropping to as low as 0.25%. The current fed funds rate sits at 1.50% with no expected adjustments through the remainder of 2019.
The point is this: The Federal Reserve is adjusting rates downwardly during a period of an apparently domestic economic boom. They have cited reasons such as: 1. Lack of inflationary figures, 2. Risks of global trade concerns and 3. Overall volatility in treasury/equity markets. The potential problem herein lies with very little room to adjust to the downside which was the preferred counter mechanism in the financial sector events mentioned above.
The fact is this: Traditional correlations in the broad investment markets have broken down in a manner like we have never seen. This is in no way to be interpreted as the sky is falling and the markets are doomed. There have been MAJOR market participants that have attempted their investment dollars based on that theory and have been 100% wrong for several years. It is simply to point out that cautious investing, keen awareness on sector rotation and implementation of some sort of hedging vehicle is absolutely imperative.
We have covered all three of these necessities in the current portfolios. As discussed in last week’s audio portion of the commentary, we did eliminate half of the hedge that we have been holding for a majority of the year. It was not a decision that was made lightly and it was not a decision that bore the ideal outcome. It did, however, allow the portfolio more upside potential while the markets seemingly desire to grind higher. It also allowed the portfolios to maintain a moderate amount of protection in the case that there is some looming headwind (which the Fed continues to shyly point towards). There will be a significant re-balance for the other existing positions in order that we can bring down the standard deviation to offset the partial unloading our volatility position.
As always, we continue to monitor all equity, treasury, commodity and currency conditions in order to efficiently deploy capital as well as protect invested assets.
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