Today the Federal Reserve is likely to announce its first .50% increase in its overnight bank lending interest rate in over 20 years.
On May 16, 2000, the Federal Reserve increased their target interest rate from 6% to 6.5%. As you may recall, the stock market peaked in March 2000 as a massive run up in technology companies’ share prices started to show signs of weakness.
In January 2001 the Federal Reserve reversed this .50% rate hike as the economy started to slow. Over the next few years they persistently reduced their target interest rate, eventually reaching a lowly 1% by June 2003.
Obviously, there are differences between then and now, but history seems to have a knack for rhyming just enough to stoke traders’ memories.
Today traders are evaluating a surprise shrinking of our economy in the first three months of this year, the recent tumbling of technology share prices, a brutal attack on a sovereign country, upcoming mid-term elections, and the Federal Reserve aggressively raising interest rates. They all rhyme with 2000.
But there is always some historical syncopation.
While inflation in 2000 had more than doubled since 1998, it only rose from 1.5% to 3.7%. Today’s inflation rate of 8.5% is astoundingly higher than the .1% annual inflation rate we experienced during the onset of the pandemic.
In 1999 the Federal Reserve started raising its overnight interest rate with a .25% increase from 4.75% to 5%. Today’s likely .50% increase will raise their target range from .25%-.50% to .75%-1.00%. However, the Federal Reserve also owns trillions of dollars of US Treasuries and mortgages that they need to begin to unwind.
We all know that history does not repeat itself and that past performance is not an indication of future results. We also naturally get nervous when we start to see patterns and rhymes.
Your April statements will document another increase in traders’ nervousness – both in the stock markets and the bond markets. At some point this nervousness will likely pass, but for the time being traders are discounting the future by selling assets.
We believe it is unknowable where the financial markets are heading in the next three months. If traders gain the economic and geopolitical clarity they seek, the markets could bounce back. If traders see nothing but economic and geopolitical fog ahead, we could see more selling.
These are the times where an investor’s patience is tested. These are the times when economic headlines start to transition to the negative, when uncertainty rules the day, and ingesting headlines and statements can make us a little uncomfortable about our futures.
Just because traders temporarily discount the future does not mean your long-term financial plan is derailed. By maintaining a calm and confident long-term focus in an increasingly ultra-short-term world, your plan can stay on track.
Quote of the week:
John Kenneth Galbraith: “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
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