Commentary by Allen B. Lang, Senior Portfolio Manager
Well Summer Is Here, What’s Next?
August 1st through the second week in September, historically, has been the vacation month for Wall Street. Volume drops off. Sometimes volatility picks up. But in the end, barring any major international news, when vacation is over, one looks back to see nothing really happened in six weeks.
The markets have hit, or nearly, hit new highs in May and June. Regardless of what happens through the middle of September, I am confident that the markets will be at higher levels by year end. We have been on the cautious side for a while and our basic strategy hasn’t changed.
It is very important to put in “stop orders” below the current market prices to protect profits already gained (on paper). There’s always time to get back into securities that were sold. Yes, there may very well be taxes to pay, but as the old saying goes, “Show me someone who doesn’t pay taxes, and I’ll show you someone who doesn’t have any assets”. You can help off-set gains by selling securities in which you have losses. (Buying back those securities requires a 31 day wait period, while selling securities for a profit can be repurchased immediately). If you don’t understand this tax strategy, give us a call.
OK, let’s talk interest rates. Boring? Yes? Important to understand? YES!
As I have said too often, the Fed was too late in raising rates after the Housing Bubble burst in 2008. There was times in 2012, 2013 and 2014 to raise rates ¼% a couple of times each year, as employment picked up, business began increasing sales both domestically and internationally.
The first increase in rates was a POSITIVE, not a negative. It showed that corporations were borrowing money for infrastructure and the economy was getting strong. That raise and a few subsequent raises
only told us things were moving in a positive fashion, economically.
Then came 2018.
The Fed erred drastically. Raising rates four(4) times was not warranted at all. Inflation was not running amok, domestic and international sales were increasing at a sustainable rate, unemployment was going lower. A raise of .25%(1/4) twice in 2018 was more than enough. Four raises sent the wrong message, not only to the markets, but to the nation. It sounded like inflation was too high and our GDP (Gross National Product) was increasing at too fast a pace. That was not the case. I never understood the explanations by the Fed as to their reasoning.
Now there’s talk about lowering rates by .25%(1/4) to .50%(1/2). Here again, this is giving us a unreasonable impression as to where our economy is and where it’s heading. Lowering rates says to me and indicates our economy is both not doing well and the lowering of rates will have a positive impact.
Nothing can be further then the truth. There are times when lowering rates is positive an when lowering rates is negative. The same goes for the increase in rates, there are times when it is positive and times when it is negative.
My suggestion is leave them where they are. Give it another year to see IF inflation rises, If unemployment goes up, If GDP goes down. There’s plenty of time to do the right thing and no rush to do it.
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