“The monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”
— Martin Zweig
In his 1986 book, “Winning on Wall Street,” Marty Zweig told us not to fight the Fed. He was speaking from personal experience. Zweig’s investment philosophy started with rigorous fundamental research, but favorable monetary conditions had to be present before he was willing to invest aggressively. His investment approach proved so successful that his investment newsletter, The Zweig Forecast, bested all other advisory newsletters over its 26 year existence. He stopped publishing it in 1997 to concentrate on his money management business and went on to amass a personal fortune of $600 million at his death in 2013.
So how is the current monetary climate? Still benign, in our view. Despite a desire to normalize interest rates, the Fed remains conflicted regarding the health of the economy. Some members appear in favor of waiting for the pace of economic growth to accelerate before raising rates. Others don’t want to wait as they believe the economy is healthy and think higher rates are needed to keep inflation from accelerating.
Meanwhile, the trend in interest rates has been mixed in 2016. Absolute yields on U.S Treasuries have moved lower this year, which is largely a consequence of zero and negative interest rate policies being pursued by other major central banks. Bond investors have unsurprisingly shown a preference for earning interest on their money rather than paying someone to use it, and U.S. bonds still offer some of the highest yields in the world.
The Fed’s latest Economic Projections trim the expected path for short-term interest rates substantially. After forecasting fed funds rates to rise by 0.50% by year-end, Fed officials now expect rates to increase by a mere 20 basis points. More strikingly, expectations for both 2017 and 2018 have been lowered by 0.50%.
These revisions are an admission by the Fed that weak economic growth is likely to persist which is not positive news for economic growth but it’s not necessarily negative. The Fed has simply faced reality and brought its growth forecasts in line with those of the International Monetary Fund and the financial markets.
The aggressive monetary policies pursued by other central banks to boost growth have been disruptive to traditional fixed income markets and forced many yield-focused investors into other asset categories which have driven valuations higher. This “new normal” is likely to persist as long as interest rates remain near historical lows.
Much like Zweig, we don’t believe in fighting the Fed either. Our Trust Investment Committee monitors monetary conditions closely and understands that low interest rates and an accommodative Fed have historically delivered stronger investment returns than under tight conditions. Unified Trust Company’s investment process is also deeply rooted in rigorous scientific research and only those investments that we believe will contribute strong risk-adjusted returns for clients make the cut. If you’d like to know more about how our investment process helps support your financial goals, please don’t hesitate to contact us.