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Recently, as I was listening to a broadcast of Bloomberg, I was reminded of the many challenges we are facing in the market today.   We seeing renewed political tension, domestic and international elections, potential changes in interest rates, and continued confusion with regard to fiscal policy, all of which are violently moving the currency markets. 

Looking back on my 25 year career as a professional money manager, It didn’t take long to realize these concerns are not new, these risks are normal and increasingly common in the global financial world we live in.   While it’s natural to worry about the tactical nature of the market, it’s our job to be sure we think strategically. 

The conclusion, last week, of the Federal Open Market Committee’s (FOMC) two day meeting sparked a rally in stocks, bonds, and commodities while tipping the scale to the sell side for the US Dollar.   Despite removing the word “patient” from its policy statement, the Federal Reserve officials showed enough caution in the statement to persuade  markets that rates would be held lower for longer and that the increases (when they come) would likely be gradual.    The key takeaways from the FOMC meeting besides the “patient” language were:

• Economic growth has slowed, but employment is making strides
• The Fed continues to rationalize the current inflation situation
• Monetary policy is still data-dependent and very flexible (the Fed’s policymaking arm  made it clear that it’s decision on when to raise rates will remain contingent upon the flow of data and just hasn’t made its mind up yet)
• The FOMC signaled that it is ready to raise rates when its members are “reasonably confident” that inflation will move back toward its 2.0%  targeted rate
• The path of rate tightening will be far more important than the start of rate tightening

My takeaway is not to fear the Fed all that much but to watch conditions closely.   While history is no indication of the future it does provide us data to be reactionary and act accordingly.   I expect 2015 to bring more stock market volatility around the Fed’s uncertainty and do not expect the initial Fed hike, whenever it may come, to send stocks into a significant correction or into bear market territory.  History has shown that stocks fared well during the three month period before a rate hike as well as the six to twelve months after the “initial” hike.  It is more likely, I believe, that we see the typical 5-10% pullbacks that tend to accompany cyclical bull markets, particularly during the latter third of market cycles.

These are the opinions of Robert O'Braitis and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

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