All About the Pace

With the release of the most recent jobs numbers, we fully expect the Federal Reserve to raise interest rates later this month for the first time in nine years. Once the Fed raises by a quarter point this month, the “market” will then begin to focus on the pace at which future rate hikes can occur. The near-zero policy was put in place as an emergency response to the financial crisis years ago. While the overall growth in the economy has been tepid at best, it has still maintained a positive number over the years. Even at 2 to 2½ percent growth, the emergency rate policy is no longer needed.


Those that have been investing for more than a few years know that uncertainty brings about volatility. This will continue as long as the focus on monthly jobs numbers continues to sway the Fed.


After six straight positive years, some economists are surprised to see the equity markets trade flat and not be more negatively impacted by the short-term uncertainty we’ve seen in 2015. Among early forecasters, there is growing consensus that equity investors should continue to expect less than historical returns over the next year or more. Regarding bonds, as many of our portfolios carry a very short duration with respect to fixed income, we are relieved to see rates move higher, though at a slow pace.


We continue to believe the markets, both stock and bond, will be volatile over shorter time periods. In the foundational book on so-called “Modern Portfolio Theory,” the authors state plainly and repeatedly that prices, in the short-term, are completely random. Macro issues are a main driver of this volatility. For example, one trader gave this explanation for Thursday’s down market (down about 250 points).


“Managers thought stocks were going to go up in Europe and assumed the euro would go down. They were so wrong that they panicked, and sold stocks and bought euros in order to unwind their trades. As if the market weren't already crazy enough, macro traders only reacted to the negative selling of stocks but did not react to the positivity of the decline in the dollar.”


Though the above is one person’s opinion and actually has some validity for this one day market move, as fiduciaries, we refuse to gamble a lifetime of savings to try and trade and react, either proactively or reactively, to the randomness of short-term volatility. The success of any investment plan is revealed through discipline.

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