Markets and The Fed
Unfortunately, for the last 7 years, financial markets have moved based on the expectations and decisions of the federal reserve instead of from fundamentals, technicals or any other historical metric. Tomorrow’s Fed announcement will likely continue this unprecedented and unwelcome pattern.
Should the Fed raise rates, we would expect that equity markets, in the short term, would tumble. Why do we expect the market to drop if the Fed chooses to raise rates? We believe a substantial increase in rates for an extended period of time would create this type of volatility because:
- Increased interest rates on new mortgages absent of inflation would suggest a decrease in home values due to rising borrowing costs.
- Corporate P&L’s would likely drop because higher rates would increase their cost of debt.
- Poor auto sales may result from the inability to finance at 0%.
- Investors could aggressively withdraw from bond funds out of fear that their principal will erode.
- A trickle down effect from the above and many more industries will be negatively impacted from this change.
If they decide rates should remain unchanged, we would expect the recent historical equity market highs to be re-tested.
Sensitivity to Rates Rising
The equity markets have shown on numerous occasions how sensitive they are to Fed speak. In the last year, we’ve witnessed how 2 small suggestions and an actual rate hike from the Fed sent equity markets quickly below their 50-day moving average.
The CBOE volatility index (VIX-also known as the fear gauge) is also hypersensitive to changes from the Fed. In the last few weeks, the VIX was resting near 52 week lows, suggesting complacency in the market. Complacency ended abruptly when a Fed chairperson suggested a rate increase in September may be warranted. After this announcement went public, the VIX catapulted over 70% in just a few short days. As it stands now, the day before their announcement, the VIX is hovering around 16 (in 2008 the VIX reached 80).
Year End Tax Planning
The 4th quarter is less than two weeks away. Get ahead of the game by reaching out to your CPA/tax team. Reaching out now, when your tax team has down time, will allow you to:
- Have a solid estimate of your year end tax bill before the year ends. This will provide you ample time to react and plan for your final bill.
- Ask your CPA about a variety of tax strategies that they may not have time to discuss during their busy season.
- Re-connect with one of the most important people in your financial life.
For more information about your investment options contact:
Jason Soloman, The Investment Professor, Tactical Investment Advisors LLC
Phone: (980) 233-9770
Address: 19825-B #149, N Cove Rd Cornelius, NC 28031
The information in this blog post is not intended as tax, financial, insurance or legal advice. Please consult a licensed professional for specific information regarding each individual situation. This post was developed and produced on a topic that may be of interest to the general public. The opinions expressed, and the material provided are for general information only and should not in any way be considered solicitation.