Waist Deep
On a recent fishing trip in Montana, Tink and I found ourselves waist deep in the Ruby River. Being waist deep in water that has current, where you cannot see the bottom, and where you have never been before can be daunting. Will I trip on an unseen rock or buried tree root? Is my foot going to get stuck in the muddy bottom? Are there any slick areas that are not safe? These thoughts were running through my head as I kept my valuable items (my fly rod, my cell phone, some food I had packed, and my fly boxes of course) hoisted above my head to keep them from getting wet. Waist deep in cold water is not the most enjoyable place to find oneself. Trusting our guide, we navigated this tricky stretch of water, we emerged from the deeper waters of the Ruby River, and resumed a very enjoyable day catching four different species of trout. We also caught some whitefish but were not lucky enough to nab a grayling. Next time.
The Federal Reserve is “waist deep” in their fight against inflation. When the Fed waded into the fight against the river of inflation in mid-2022, they used the classic Fed textbook, raising interest rates 525 basis points over a 16 month period. That’s a 5.25% increase in rates, for those who don’t know Fedspeak. And then they held rates at this level for 14 more months. The tight monetary policy caused the yield curve to invert (short rates higher than longer term rates), economists to predict an imminent recession, and many market forecasts were flavored with different perilous prognostications. It was not comfortable being an investor during the battle against inflation.
Why? Market volatility increased. Certain industries benefitted while some were harmed. Yet, according to Raymond James Fixed Income Strategist Doug Drabik, the Fed’s strategy seems to have worked (see Drabik’s “Bond Market Commentary”, 9/23/24).
How? Inflation has fallen 50% from its peak and Personal Consumption Expenditures (a measure of inflation) stand at 2.62%, down from a peak of 5.57%. The Fed goal is 2%, by the way. We’ve made great progress and are almost there. But…
Will the Fed face hidden troubles as it traverses these unchartered waters? In his recent commentary, Drabik shares with us that consumer spending has held up, which is good, but consumer debt has climbed. Personal saving is well below average and job market indicators have fallen in 8 of the last 12 months. These are not positive developments. U.S. Gross Domestic Product (GDP) has held up, but government debt as a percentage of GDP is at a record level. The question emerges: Will fixed income investors reach a conclusion that limits the Fed’s ability to continue successfully managing interest rates?
So far, the Fed has done a solid job battling back from the pandemic-related inflation mess. Over the next several quarters, as we move through these many challenging currents we should expect volatility. Now is an important time to make sure your portfolio contains both elements of safety and opportunities for growth. The goal of 2% inflation plus a solid job market is likely to lead to growing GDP and a stronger global economy. If the Fed is successful, investors will enjoy more days like our recent day on the Ruby.
Ralph McDevittSeptember 24,2024
Read Doug Drabik’s 9/23/24 commentary here: Bond Market Commentary
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Past performance is not indicative of future results. Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.
