“I think the efficacy of the dot plot probably decays over the three-month period between that meeting and the next meeting…; we do personally update our forecast, but we don’t formally update the dot plot.” – Jerome Powell, Chair of the Federal Reserve of the United States (the Fed)
This line from Powell, and others similarly dovish, has been enough to put a fire under risk assets, with global equities rising (fig.1) and bond yields falling since the beginning of the month. Powell was responding to weaker US economic data, but data out of the Eurozone and the UK has been unarguably poorer. So, it seems reasonable to say that in much of the developed world, taking this snapshot in isolation, inflationary pressures have diminished and the need to raise interest rates has abated. It would also seem rational to say that we may have already witnessed peak inflation, but not all the data confirm this point.
MSCI World Vs. Cash/Money Market – Post Fed’s Comments (fig.1)*
However, what interests us here is the market reaction to the Fed’s reaction to the data. Whilst the inflationary data looks more benign, we cannot say with any certainty that we won’t see a further escalation in the coming months, forcing the Fed to stay higher for longer or even increase rates again.
This complete lack of clarity brings us to the subject of cash and market timing.
The recent data events might be for real, and markets continue to increase in value, or it might be a dress rehearsal for when rates start to fall and, in the meantime, markets roll over again. Since even the largest Wall Street banks, with their team of macro strategists, banks of analysts and various other experts, cannot agree on what to infer from the myriad of data that is produced daily, then how can those in less informed positions?
Our point is – that markets move quickly, quicker than ever, and certainly faster than retail clients with or without an adviser can practicably react. So, for those who have fled to cash or are still thinking they should, it is worth giving some time for when, and if, they might want to get back in and what the triggers would be. What is highly unlikely to work is waiting for confirmation it’s safe to go back in the water via the mainstream media. By the time any news is considered sufficiently newsworthy, the markets will have already moved.
As a separate but connected point, if inflation has peaked and so have interest rates, then it would be reasonable to read across from that the highs are in for cash. In recent historical terms and purely relative to risk assets, it could be said that cash is expensive. So, a possible scenario could be that the global economy falters, (cash) rates fall, and bonds and/or equities go up in value.
So, in conclusion, if we do indeed accept how much we cannot know, it would seem to make sense to invest (or stay invested) across the available asset classes. We can know when an asset is cheap or expensive relative to its history and any alternatives, but we cannot know when the asset will re-price or what the exact catalyst will be.
*Information is short term in nature to demonstrate performance over a specific time period. Please contact IBOSS for long term data, including since launch and/or 5 years.
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