It feels only appropriate to begin this article with “I don’t know.” I don’t know what will happen next – no one does for sure, but a lot has happened recently, and it’s worth a quick recap and consideration of what that likely means for us going forward.
A few weeks ago, the Department of Labor released a jobs report that showed a slowing jobs market and an uptick in employment. The market temporarily sold off in the following days but quickly rebounded despite panicky headlines. Since then, the DOL has revised its numbers over the last several months to account for roughly 818,000 fewer jobs added than previously recorded. All of this points to slowing growth in the economy.
In related news, at its recent annual conference in Jackson, the Federal Reserve indicated that it anticipates cutting rates in September. This announcement is unsurprising, given that the Federal Reserve is essentially tasked with balancing the economy. As we’ve written about in the past, the Federal Reserve has a dual mandate – to manage inflation and unemployment. It does this mainly by raising and lowering what’s known as the Federal Funds rate, which sets the pace for lending across the banking sector. Known as monetary policy, this effectively impacts the availability of cash to corporations and individuals (the other lever impacting cash being fiscal policy set by Congress).
I offer this short primer on the Fed because I think it’s helpful to remember that the Fed often counters what’s going on in the economy. Its goal isn’t to prop up the economy or to accomplish policy. Its goal is balance. This means that when inflation is running high because there is too much money/demand facing too few goods/supply, the Fed raises rates, hoping to lower demand and ease inflation. Now that inflation has fallen, we’re starting to see the other side of the coin – less money is available, and with lower demand, corporations may need to cut back spending, leading to fewer jobs. To balance that out, the Fed will lower rates, making it easier to borrow money and essentially easier to spend.
Of course, economic theory is predicated on the theory of how things should work, and if economics is the A-type, firstborn, finance is the rebellious second child that plays out a messier reality. In a vacuum, economic theory would suggest that the balancing act should work. Still, it often fails to consider the unexpected human behavior and natural occurrences – Wall Street bets, market momentum and exuberance, pandemics, geopolitical conflict, and natural disasters. And while economic theory can explain what we might expect, it can’t give us a crystal ball. Hence, I don’t know what will happen next. However, there are some likely effects of the current environment.
As the Fed begins lowering rates, we should expect additional volatility. This is because the main reason they’re lowering rates is slowing growth, and while cheaper money is a positive for markets and pocketbooks alike, slowing growth is not. Hence, we will likely continue to see volatility as markets respond to news like lower jobs reports. While the expectation of lower rates is primarily baked into market expectations, there will still be some shifts that play out over time, particularly on the fixed-income side.
We’ve gotten used to higher yields on short-term securities in recent months. This has been particularly meaningful given that cash yielded almost nothing for the better part of the last decade. While it is unlikely rates will fall anywhere close to zero again any time soon, falling borrowing rates mean falling yields for lenders. If the Fed makes it cheaper for banks to borrow, they don’t have to offer as much interest, which means cash and other short-term securities will pay less in interest. There is a positive side for fixed-income securities: the traditionally inverse relationship between price and yield – when yields fall, prices rise (because higher locked-in yields become more valuable in the future in a low-rate environment). Thus, when prices rise, those investments get a total return bump. For that reason, many analysts are cautiously optimistic about fixed-income investments right now, and for our part, we remain committed to the benefits of a diversified portfolio.
While we generally try to stay out of politics, recognizing that our jobs here are to respond to the hand we’re dealt, it is also worth noting that political cycles can often cause added volatility because they contribute to uncertainty, and there is the possibility that we will feel some of that in the markets as the election cycle comes to a close. While there may be some choppy days, markets take a long-term view and usually adjust over time as investors consider the broader economic environment, which factors in a wide range of variables in addition to government policy. As always, we’ll stay appraised of the unfolding events and adjust our outlooks accordingly.
At Sherwood, we believe that keeping you aware of what we’re learning and thinking is a helpful way for you to stay up-to-date on your investments and how we consider the economy and financial markets as they relate to your specific financial situation and goals. We’re happy to talk through any questions or concerns you have along the way and welcome the opportunity to help ensure your living legacy remains at the forefront of whatever is happening in the news cycle.
Casselman, B. (2024, August 21). U.S. added 818,000 fewer jobs than reported earlier. The New York Times. https://www.nytimes.com/2024/08/21/business/economy/us-jobs-economy.html#:~:text=On%20Wednesday%2C%20the%20Labor%20Department,months%20that%20ended%20in%20March.
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