When Chairman Powell stated that “rates remain a long way from neutral,” he made sure equity markets will remain a long way from their highs. Additional comments by the Fed, or the removal of certain words from the Fed statement, only added to the uncertainty of the past 30 days, creating havoc in the bond and equity markets.
An increased level of volatility infected the markets, one usually reserved for times when gauges of economic activity are turning down or excesses are being rung out of the financial system. If you believe the markets are forward looking, then it seems the economy is headed for a soft patch or perhaps even a downturn. But very few of the leading or coincidental indicators are predicting this. Job growth is good, corporate profits remain healthy, wages are increasing, capital investment is improving, and confidence is high. Even productivity is up. What gives? What is the market action of the past month telling us?
One thing being communicated is that higher discount rates mean lower valuations and market multiples will need to be adjusted downward. It’s also telling us that with the job market so tight and the pool of available workers scarce, wage inflation looks ready to crawl out of its long hibernation. This will impact the cost of consumption across the board and the Fed will need to act more aggressively. Many argue that the recent increases in productivity will offset the increase in wages, but only time will tell if recent improvements in the productivity gauges are persistent.
The equity markets, and to some degree the long sleepy bond market, are portending change. Whether the Fed will need to play catch up to inflation, or whether valuations need to be adjusted to increasing rates matters little. Markets are in transition and remain riskier than normal. Two times this year we have closed at 2581 on the S&P. A close below this number would be troubling.
Risk is easy to talk about when markets go up but in volatile markets, we all find out how much risk we can really tolerate. Make sure your clients understand just how much risk is still embedded in a market that already seems uncomfortably risky.
SCI HIGHLIGHTS
NOVEMBER 1st
SCI QUARTERLY RE-BALANCE
It’s that time again…
Please consider risk profiles and model mapping along with any cash management needs for your SCI clients as we move toward the SCI Quarterly re-balance.
SCI Monthly Webinar
OUR NEXT SESSION:
TUESDAY, NOVEMBER 13th
@ 12:00 PM CDT
In our next session Jim Baldwin and Bob Dunne will discuss and analyze the recent SCI Quarterly re-balance.
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