I’ve often been fascinated by markets’ reactions. And I’ve often said about market behavior, it doesn’t matter so much WHAT happens in the country, as HOW the markets react. This is the syndrome where bad news (for the country) might be good news for the markets, and vice versa.

Case in point: I don’t think that there’s an adult who reads or listens to some form of ‘news’ that didn’t know that the Fed was planning to raise rates by 0.75% this week. And yet, when the actual announcement was made, markets reacted with a huge selloff. One would think (I would think) that the information would have already been baked into markets, but no — apparently not!

My expectation that markets would react calmly to the actual announcement since most of the world had the same expectation was shattered as markets met the announcement with one of the larger drops in recent market history.

To decipher Fed-speak, I believe they said that they plan to continue raising rates but at a slower pace than they had over the past four meetings. The current rate level is now 3.75 to 4%, which is rather an amazing change over the past six months. It appears to me that there is a clear (as clear as could be, all things considered) shift on the horizon.

Some additional fodder… The Fed said it anticipates that ongoing hikes will be appropriate until they have reached ‘a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time’. My questions are ‘What level will prove sufficiently restrictive?’  ‘Does anyone know?’ Alas, the questions go unanswered. Has the Fed even acknowledged the questions? And why the arbitrary 2% target?

As this year began the Fed expressed that cumulative hikes of 75 basis points would be enough to quell inflation — THIS year. In March it became 175 bps, in June it was 325, and as of September it was 425. At this week’s press conference, Powell said the restrictive level now looks to be even higher. What is driving that? Helium?

Another worthy statement on which to cogitate, is that the Fed will take into account the ‘lags with which monetary policy affects economic activity and inflation’. In English, the Fed is moving toward a more measured pace of rate hikes while they wait to see the results of the year’s actions so far.

So what DON’T we know? How fast, how high, and how long? After a clearly LATE start, the FED has moved at an alarmingly fast rate to raise rates. How long will rates remain elevated, and at what level will rates have to reach to bring inflation in check? I believe that rates will reach higher numbers and will likely remain there for longer than was anticipated. The fight is far from over. This week’s actions appear to represent a pivot in their methodology in approaching the fight. This was not the pivot that many in the financial community were seeking.

One further question: How will they know when the fight is over?

Ron’s Market Minute- Market Returns

When asked ‘what are the annual market returns?’ it seems that most people react with a number somewhere between 8 and 10%. As I searched the internet this morning for some historical numbers, I found a rather illuminating chart. As in so many areas, the time frame that one examines makes a big difference. This particular chart appears to come from a Bloomberg study, and it goes back a lot farther than most. If we look at the decade from 2010 to 2020 (chart only up to 2018) we get one approximation. If we look at the decade of the 1960’s it’s quite another. Take a look:

But the point that most people don’t seem to realize is that there are VERY FEW years in which markets actually do return a one-year number that is near the average. In fact, there appear to be about a dozen years in which the markets gave a return of minus 20% or worse, and somewhere in excess of 35 years in which markets gave a return of plus 20% or more. The actual dispersion of returns is pretty wide. The positively slanted dispersion is the reward that we have received over history for the pain of years like 2022. As in so many things, perspective matters. 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

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Past performance is not a guarantee of future returns.