The Fed’s Pivotal Quarter Overview
The U.S. Federal Reserve started lifting interest rates over two years ago and, we
believe, finally stopped nearly a year ago. Investors, who tend to be forward looking, went from anticipating rate hikes to anticipating rate cuts very quickly. The
Fed acknowledges the Fed Funds rate is currently restrictive but wants to gain
more comfort that inflation is easing toward their 2% target before cutting rates. It
is a balancing act because inflation data is backward-looking, and restrictive Fed
policy can increase unemployment and cause a recession.
The good news is the Fed finally got what they wanted in June. The May inflation
data was promising, and we think these sorts of reports could continue as the
economy cools and the labor market weakens, putting downward pressure on
both wage and price inflation.
We are optimistic the Fed will end up cutting rates more than expected this year.
While bond markets may not have fully priced this in, equity markets have been
flying high on artificial intelligence enthusiasm. Valuations in technology and
growth stocks are high and concentration in large cap indexes is also high. Few
stocks with large weights in indexes have driven the whole market higher.
This could spell volatility for equity markets at some point, but currently the
momentum is strong. A pullback could also create opportunities as a lot of cash is
piled into money markets which could find its way into equities if investors find
themselves with better entry points.
The bond market seems attractive now with good risk-and-reward dynamics,
especially shorter-term bonds if the Fed does end up cutting rates more than
expected. Bonds can also mitigate potential equity volatility.
Your Cetera financial professional can keep you focused on your personal goals
and objectives. There will be added distractions thanks to it being an election year,
but focusing on your own goals and objectives will help take the emotion out of
investing. Election years tend to be good years for stocks regardless of who wins.
There are larger macro-economic forces at play and the President’s ability to enact
change is limited, especially with a divided Congress. Both Biden and Trump have
been president before, limiting the uncertainty of a new president.
About Cetera® Investment Management
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Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other
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About Cetera Financial Group
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at 655 W. Broadway, 11th Floor, San Diego, CA 92101.
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