October 2018 Client Letter
When stock market volatility escalates, clients may ask what needs to be done with their portfolio. I explain that often minimal, if any, trading is required. Certainly, heading to the exits is not a strategy we favor.
The 2008/2009 global financial crisis destroyed almost $12 trillion of America’s net wealth. Measured globally, the figure was much larger. Many households and businesses saw their net worth cut in half, or worse. Wealth that had been accumulated over years of diligent saving and investment was annihilated in a matter of months.
Not long ago, Wall Street’s favorite acronym was BRICs (Brazil, Russia, India, and China). The BRIC countries were hyped by many of the big brokerage firms as an investment opportunity with profound promise. As a group, the BRICs were believed to have attractive natural resources, a young overall population, and years of robust growth ahead.
Federal deficits and debt are a perennial worry for many investors, but while a burgeoning U.S. government is a long-term problem, public finance at the state level may be the more immediate concern. The Wall Street Journal recently ran a feature highlighting the troubling condition of state budgets.
Even nine years after the last recession, many state budgets still haven’t fully
In my January letter, I commented on how it would not be a surprise to see the Federal Reserve raise the Federal Funds rate four times in 2018. When the year started, the Fed indicated it would look to target a total of three hikes this year. In mid-June, as expected, the Fed raised rates for a second time in 2018, bringing the Fed Funds target rate up to 2%. The two additional rate hikes should come in September and December.
How many more times will the Fed raise interest rates before stopping? Many variables go into the Fed’s interest rate decisions; but, historically, short-term interest rates have been as much as 1.5 percentage points higher than the rate of inflation. With today’s Fed Funds rate at 2% and consumer prices rising annually at about 2.2% (as measured by core CPI), the Fed still has significant room to raise rates without overdoing it, even assuming moderate economic growth.
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