The Fed: More Goldilocks
While it may seem boring, this
is important from the standpoint of your investment portfolio: yesterday, as
expected, the Federal Reserve raised its Federal funds (overnight interbank
lending) target rate range by 25 basis points to 1.75-2.00%. The importance is
not so much the rate itself (still highly accommodative) but rather the outlook
commentary and posture of the Fed’s economic viewpoint. The viewpoint appears
to continue to support a “goldilocks” environment for stocks.
The Fed’s commentary
following its FOMC meetings is sliced and diced six ways to Sunday by the media
and investment industry pundits. Our take on the Fed’s commentary is pretty
straightforward: 1) the Fed is essentially saying that the economy is looking
very good; 2) inflation and inflation expectations remain stable and moderate,
around 2%; 3) there is no change in the Fed’s interest rate policy, which is
continued steady quarterly increases in the Fed funds rate: two more this year
and probably three more next year. We believe this outlook is actually quite
positive (almost “goldilocks”-ish) for stocks because it indicates the Fed, in
both its actions and outlook, remains committed to providing a monetary
backdrop that is conducive to economic growth which, in turn, is supportive of
corporate profit growth, the single most important driver of stock prices.
Some pundits have raised
alarm bells that the Fed rate policy ultimately sets the stage for inverting
the yield curve and tipping the economy into a recession. These same pundits
take a guess at when the next recession starts, and some of them are now saying
2020. While pundits are paid to write and stay stuff that sounds smart (and
granted many of them are smart), we respectfully submit that not only is it
difficult to forecast a recession, but also we believe the current expansion
could be surprisingly durable and last longer than many now expect. Our
reasoning? Currently there do not appear to be major economic or
financial imbalances that usually precede an economic downturn. Inflation
continues to remain moderate. Fed policy remains accommodative. The corporate
profit outlook remains healthy. Valuations based on forward P/E are not exceedingly
high at 17x.
So what does this have to do
with financial planning? We, as a fiduciary to our clients, need to have a
framework for setting investment policy. Along with factors such as the
economy, inflation, corporate profits, valuation, and geopolitical risks, Fed
policy is a critical element in assessing the investment environment. Based on
these factors, we still believe the outlook for stocks remains quite positive
and this gets reflected in our allocation to equities, which we are currently
overweighting in our strategies . While the risks of a trade war have been
prominent in the news of late, at this point, we still believe the risk of an
all-out damaging trade war remains low. We will be holding our Q3 investment
strategy meeting on June 27 and will have a further update on our investment
strategy at that time.
Robert Toomey, CFA/CFP
Vice President, Research 
