Interested in Interest Rates
Despite a shaky July and early August, the major US indexes were able to work their way back up to their prior highs by mid-September – just in time for a highly anticipated announcement from the Federal Reserve. We all wondered if inflation had declined enough from the lofty spike in 2022 to warrant relaxing interest rates. The announcement delivered on September 18th was dramatic (if you happen to consider Federal Reserve rate decisions to be exciting, tension filled events); a full 50 basis point cut to a target range of 4.75%-5%, representing the first easing of monetary policy in four years. The Fed cited data from August that showed inflation had fallen to about a 2.5% clip – much closer to its 2% target – and included statements indicating that the economy appears to be in better balance for now, though data from the same period also indicated that the labor market may be slowing a bit more quickly than expected. Markets have reacted positively since then, with all three major US indexes pushing higher in the weeks following the announcement.
The exuberance related to declining interest rates and inflation wasn’t just limited to stocks. Bond prices added to a strong run that started in the second quarter. Prices made a meaningful move higher as investors started to anticipate the possibility of rate cuts – little surprise in hindsight if we remember that bond prices move inversely to interest rates. As such, bonds appear ready to put the 2022-2023 bear market behind them and, with some tailwinds from the Fed, start the long road to recovery.
With markets barely taking a breather, our outlook has not shifted from last quarter; we are still firmly in bullish territory and have our portfolios allocated to the top end of their equity ranges. However, despite a bear market in 2022 and the brief but terrifying hiccup of the COVID market in 2020, it has been a very strong fifteen-year run from 2009’s lows. While we have some concerns about whether returns over the next decade will be able to match those of the prior, we believe, as always, that the best answer to that unknown is the commitment to a well-diversified, systematic, and objectively applied strategy.