What is More Important Than the Election? The Fed

October 18, 2016

 If you are anything like me, you are ready for the election cycle to be over so we can go back to our day to day lives. The American Psychological Association (APA) recently released their survey that indicated over half of Americans are feeling either somewhat or significantly stressed about the upcoming election. Many investors feel the stress even more, wondering what the election is going to do to the stock market. While it is tempting to keep your eyes glued to the two candidates, it is important not to lose track of who really has the power to move the market in the short term, the Federal Reserve.

 

 

The Federal Open Market Committee (FOMC) meeting was recently held at the end of September and under former chairman Bernanke, it became common policy to release notes from the meeting to help bring transparency to the market. Understanding what the Fed is thinking in many ways is much more critical to understanding what the market is going to do in the short term than the upcoming election. The reason is fairly simple, underlying all investment valuation typically is an interest rate that helps determine a security’s value. While the Fed has limited ability to control interest rates (particularly long-term rates), they do have significant control over short-term rates and can easily influence the market with by changing these rates.

 

Fortunately, the Federal Reserve has been tightly controlled over the past year or so under Janet Yellen and the move in rates has been historically slow. The September meeting notes from the FOMC do show a split among the members of the committee on whether it is time to raise rates again before the end of the year. Most likely they would not increase rates right before the election which means that if the increase does occur it will be in December if they decide to raise rates by the end of the year.

 

So what does this mean investment wise for your portfolio? First is to recognize that the increase will likely be very small, probably an increase from 0.25% to 0.5%. Historically this is a much smaller and slower move and it is largely anticipated by the market at this point. The market has mostly priced this in already and so a move at this point would be redundant. Theoretically, the trend in rates should be up over the intermediate future but at a very reasonable rate. Simple caution in long-term bonds is the most prudent move and any overreaction to abandon bonds entirely would be foolish. Even during a year that the Federal Reserve began to raise rates, bonds overall have averaged around a 5% return with very little volatility.

 

At Cedarstone we continue to preach strong portfolio construction as the best way to handle the uncertainty in the future. Making sure your investments match your goals is paramount to success and long-term discipline will always be the best way to make sure your goals are realized. If you have any questions or want to know more about how we are currently positioned in the market, never hesitate to reach out to one of our advisors.

 

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