Thierry Hasse: Volatility reinforces how patient, long-term investing is a virtue
What a difference a week makes! We closed the first trading week of the month with the worst performance for equity markets since the regional bank crisis in early 2023, when Silicon Valley Bank, with over $200 billion in assets, went bankrupt in a matter of days. Financial pundits were bracing for further decline amid increasing talk of an impending economic recession in the U.S. Then, without any obvious catalyst, equity markets steadily rose throughout the second week of September to finish again very close to the record high reached in mid-July. These last two weeks only reinforce our view that long-term investing, matched to each individual investor’s risk tolerance, is the most sensible way to navigate volatile times.
Chief Investment Officer Thierry Hasse
Inflation continues downward trajectory
The release of the Consumer Price Index on Tuesday showed that inflation is continuing its slow return toward the Federal Reserve’s 2% target. While the pace of price increases slowed to 2.5%, the core CPI (excluding volatile food and energy) was still slightly higher than expected with an increase of 0.3% month over month versus the 0.2% economists were expecting. This small difference was enough to send the Dow Jones lower by more than 700 points a couple of hours into the trading session. Cooler heads prevailed, however, and the U.S. market indices steadily recovered throughout the day to finish in positive territory. These large market swings were in line with the reputation that September and October have for being fitful months.
Fed interest rate cut likely to be 25 basis points
The slight disappointment in the core CPI reading should settle the debate about the size of the interest rate cut the Federal Reserve is expected to deliver during the Federal Open Markets Committee meeting this week. We believe a 50 basis point cut is out of the picture. The Fed is likely to start with a modest 25 basis point reduction in order to keep their inflation-fighting credibility and to allow more economic data to trickle in over the next few months.
The yield curve is no longer inverted! Two-year notes finished the week at 3.59% yield, the lowest level in 52 weeks, while the 10-year Treasury, less sensitive to the Fed policy rate, is yielding 3.66%. With the Federal Reserve set to deliver its first rate cut this week, fixed income market participants anticipating at least 150 basis points of rate reduction over the next 12 months might be setting themselves for significant disappointment. Indeed, the economy may experience renewed inflationary pressures, or growing U.S. budget deficits may require higher rates to be financed in the Treasury market. It took less than 100 days to accumulate the last $1 trillion debt.
Mark your calendars
The entire financial world will be tuned in at 2 p.m. on Wednesday as the Fed announces its rate cut decision, followed by a news conference with Fed Chairman Jerome Powell. Financial reporters will surely try to obtain clarity on the pace of future interest rate cuts. We would be surprised if the chairman deviates much from reiterating the Federal Reserve has a dual mandate of price stability and full employment.
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