This Week in the Market
With Scott McCaghren
The overall marketplace has not changed much this week in the way of volatility. What has changed is the Federal Reserve’s surprise rate cut in an intra-meeting announcement. We realize there might have been some confusion in last week’s commentary as to what the significance is for the investment landscape.
We certainly understand that interest rates can’t cure a virus, and could even have some other repercussions for the longer term. The fact is this, the stock market loves low interest rates given that it creates a lack of competition for investment dollars. This was the preferred action in 2008 during the Financial Crisis. The was also the preferred method last year to combat potential economic woes due to the trade deal with China. In both instances, equities found themselves back at fresh all-time highs. Inching toward the “zero-bound” can obviously have some stresses related to it but we think in the short-term it will provide a boost to stocks. This move by the Fed was essentially to combat the potential for elevated risks to economic activity as well as potential disruptions to the global supply chain.
We understand that volatility can be scary during times like we have today. One thing to point out would be this: volatility is nowhere near the levels it was at during the 4th quarter of 2018. It dropped drastically as stocks rebounded in sharp fashion throughout 2019. Our plan remains the same which is to raise a bit of a cash position at levels higher than here in the major indices. That level is essentially 5% higher than today’s level as well as close to the year open. This will be our place to raise some cash not only for the natural smoothing effect on volatility, but also provide for some opportunistic buying if economic data has been slightly impacted.
Remember, we have several components inside the portfolios that we have discussed for several months now. They are doing their job to help in smoothing out volatility on their own. The goal for those positions is to lower the vol in the portfolios around 30-40%. This was done well in advance as we had some previous concerns that the market might just take a breather in order to provide a more sustainable journey higher. We are prepared for several different outcomes for the overall marketplace and are prepared to deploy at a given notice. We just believe the most likely scenario is higher before lower.
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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