“Should I Stay or Should I Go?”-The Clash
With all due respect to The Clash, I couldn’t help thinking about those lyrics as we enter the week anxiously anticipating the results of the Bank of Japan and the Federal Reserve meetings. By the time this blog is posted, the BOJ and Fed will have delivered their policy decisions and the investment implications will be evident. It has been asked a hundred times over the last five years, but we do so again; are this week’s meetings the most important ever? A bit hyperbolic I admit, but what are the implications for investors.
On September 14th, the Census Bureau issued its annual report on incomes and poverty in America. Median incomes rose 5.2% from $53,718 to $56,516-the largest arithmetic and percentage increase since 1967. The other bright spot in the report is that income growth is being driven most by the bottom two deciles of the income distribution. Overall, the household income gains suggest significant strength in the labor market.
This news, however, comes at a time when several economic reports have thrown cold water on the hopes for a rebound in growth. The ISM Manufacturing Index has recently moved into contraction territory at 49.4. The ISM Non-Manufacturing Index also fell by a larger than expected 4.1 points.
As a result, many economists and hedge fund managers, including Ray Dalio speaking at the “Delivering Alpha” conference, believe the Fed should be on hold for the foreseeable future. For these folks, raising rates will surely put the U.S. into recession.
At Braver, we are not so sure about that. One thing that is certain: the volatility that was absent in the summer will return as the fall begins. As I was reading over the weekend, I was struck by the following chart.
All the focus on central bank policy has created a tremendous amount of noise. Investors are now being whipsawed by the siren calls of doom, recession, and market crashes. The uncertainty around the Fed and BOJ has also created confusion. Holding a stock for four months does not create long term wealth. At Braver, our Dividend Income and Balanced Income portfolios continue to find high quality, dividend paying stocks that we hope to hold for a long time.
As you can see in the chart below posted by Eric Balchunas of Bloomberg, bond investors in September have grown nervous in anticipation of a Fed hike. As regular readers of “What’s On Tap,” you know we have been encouraging the Fed to raise at least a quarter point to begin the normalization process. Over the last several months, LIBOR has risen as well as the strength of the dollar, effectively tightening monetary policy. Although I expect the Fed to hike at least once before the end of the year, the path for future rate hikes may be slower than many would expect. The battle between economic data and the labor market rages on here in the U.S. But we must remember that the U.S. is in a global economic environment today. The Fed clearly is struggling to balance its domestic mandates and responsibilities with global economic ramifications.
Thank you for your business. Enjoy the beautiful fall weather, the kids’ games and the return of football.
Intended for investment professional use only
IMPORTANT INFORMATION: This material is for information purposes only. The views expressed are those of the author(s) as of the date noted and not necessarily of the Firm and are subject to change based on market or other conditions without notice. The information should not be construed as investment advice or a recommendation to buy or sell any security or investment product. It does not take into account an investor's particular objectives, risk tolerance, tax status, investment horizon, or other potential limitations. All material has been obtained from sources believed to be reliable, but the accuracy cannot be guaranteed. We do not seek to endorse any investment products or financial services described herein. Any information about a product or service should be confirmed with its sponsor. Any remote links herein are provided only for your convenience and Braver Capital has no interest in, responsibility for, or control of the information on the linked website. We make no promises or warranties, expressed nor implied, including the accuracy of and fitness for a particular purpose of the content on any linked website. In no way will Braver Capital be liable for any damages resulting from use of these links under any circumstances.