Patience Is a Virtue

Throughout 2018, we maintained that the rising interest-rate regime was THE most important factor influencing the investment landscape. However, the Federal Reserve shifted course in January when it signaled the end of its rate hikes and the beginning of “the pause.” As of yesterday, eleven of seventeen FOMC members no longer see the conditions that would warrant rate hikes in 2019. This is notable not only because in December the opposite was the case (eleven of seventeen members felt conditions would warrant either two or three rate hikes in 2019), but also because this is the first time a majority of members have become “dovish” since the tightening cycle began.

In his press conference, Chairman Jerome Powell provided some sound advice. When talking about the committee’s policy forecasts he emphasized that the forecasts are not a plan, but rather a possible path given the likely evolution of conditions. He made a point of saying that the committee discusses other possible scenarios that, while they may not see as likely, are at least plausible.

Planning for the likely, while being flexible in allowing for the plausible, is an excellent approach to investing as well as monetary policy. It is blindingly obvious that the future is unknowable. Yet some people invest as if the future can be known, failing to account for possibilities that, while unlikely, are certainly plausible.

The markets, buoyed by the prospect of “lower-for-longer” interest rates, reacted positively to the Fed’s statement and Powell’s press conference. After a couple of hours, the markets began to digest a bit of why the Fed is looking at lower for longer: the economy is softening, and perhaps materially so. There is certainly no need for panic, but the drop-off in global trade, declining growth in China, stagnation in Europe, weak retail sales, high levels of domestic debt, and soft housing data are all indicators that the economy is not running at 2018 speed.

A lower rate of growth relative to 2018 is a likely outcome we see as well. And while lower interest rates and lower inflation expectations tend to push equity prices higher (barring a recession) over the near term, it is also true that slower economic growth tends to suppress corporate earnings prospects.

Yet there are other plausible outcomes. On my podcast, The FarrCast, last week, my friend Jack Bouroudjian made a compelling case that advances in new technologies, particularly in artificial intelligence, will engender a boost in productivity that will see rapid expansion of the economy as well as the equity markets. There are also people, many of whom I respect, who foresee an imminent recession and stock-market correction due to high levels of economy-wide debt.

It’s important as an investor to not bet heavily on one outcome or another. If you want to gamble, visit a casino. Instead of making big one-side bets, you should invest with a strategy and a discipline that, yes, is attuned to what you see as most likely outcome. But you should also put yourself in a position to weather other possible scenarios. Your strategy and your discipline is informed by your time horizon, your income needs, and your risk tolerance.

One of the last things Chairman Powell said in his press conference was, “It’s a great time to be patient.” It’s a great time for investors to be patient just as our central bankers are. We have low unemployment, rising incomes, solid growth prospects, low inflation, and low interest rates.

Patience is not complacency. Although we believe it more likely than not that the current low-growth, but generally positive, conditions will continue, we remain vigilant and positioned to withstand the many potential risks.