On September 21, Janet Yellen and Federal Open Market Committee members left The Federal Funds Rate unchanged. Previously, the likelihood of a rise in the rate had become elevated. Even as the rate is unchanged now, the meeting notes imply that a rate increase may be warranted in December. Whether an increase in the rate comes in December or early in 2017, it is obvious that monetary policy remains highly accommodative. With fragile economic growth and low inflation, there is little reason to restrict money supply with higher interest rates.
Although the Federal Reserve is wholly independent, debates surrounding the merits of policy decisions made there are often political. As it stands, some criticism regarding Fed policy is justified. After all, an artificially low interest rate punishes saving and encourages borrowing and spending. Furthermore, what with bonds yielding less than 2% and cash yielding nothing, investors seeking a higher return bid up prices by buying stocks and other investments that carry higher risk. As a result, both stocks and bonds are expensive today. At ASG, we therefore recommend that investors prepare for lower investment returns in the years ahead.
Now that the Fed Funds Rate is unchanged, there is little to distract investors from the presidential election. The race to the White House has tightened in the polls. Firebrand Donald Trump and Establishment Candidate Hillary Clinton have abandoned the valuable space known as the political center. If independent and undecided voters are unlikely to run into the arms of a third party candidate, frustration with both major party candidates may run higher. Elevated market volatility would come as no surprise. So, what are investors to do?
Jonathan Lemco, Ph.D., a senior strategist at Vanguard and former professor of political science at Johns Hopkins University, offers valuable insight. He has studied market performance related to presidential elections dating back to 1853. He recently said, “The outcome of the election is meaningful because markets inevitably react and having some context for short-term market movements can help investors manage expectations. But in the end, short-term developments are less important to our success than the big-picture trends that will shape markets in the years ahead.”
As we celebrate autumn, a year-end portfolio review is recommended. This review will likely include the timeless investment principles of asset allocation and broad diversification. In summary, our investment advice for this contentious election season is to remain focused on things within our control.
Asset Strategies Group, LLC / an Independent Investment Advisor Firm