Risk Increases as the Fed Cuts Rates

On March 3rd the U.S. Federal Reserve issued an emergency inter-meeting half-point rate cut. As I wrote in my March commentary, the market was increasingly pricing in a Fed Funds rate cut. The question was not if, but when and more importantly, how much. The Fed wasted no time trying to catch up to market forces. Long-term interest rates, which are controlled by the markets and not the Fed, were moving lower and the Fed was forced to respond. Unfortunately, this is not exactly how I would have liked it to play out, as I believe it diminished some of the benefit of the rate cut. Being reactive is usually not as good as being proactive.

What the Fed Saw

The Federal Reserve is looking at much of the same data we are (they also have access to some additional information before it’s released to the public). The Allegiant team has been talking about the fragile state of the economy for a while. Over the last year-plus, I have specifically detailed our concerns about the slowing economy and market fundamentals through many of my commentaries. To make this easy, here is a quick recap of the major points:

  • U.S. equity valuations are above average.
  • Economic growth is slowing.
  • Downside risks are increasing, while upside catalysts are declining.
  • With growth slightly above stall speed, any negative shock could push the economy into a recession. The coronavirus outbreak has the potential to become that negative shock.

This is not to say there is no positive potential for the economy and markets, because there certainly is. What we are experiencing right now could change on a dime. Unfortunately, no one has a crystal ball. We can only evaluate the environment we see today and what we see shows increased risk levels. 

We are Risk Managers

Just like the Federal Reserve Board saw increased risk in the economy and stepped in, we also see a risk to the economy and are choosing to act. Not because we know what markets will do going forward, no one does. We are acting because we know that risk levels have increased. It is our job to manage that risk and adjust portfolios back to an appropriate level for you. As such, out of an abundance of caution, we are making some changes in the portfolios, where appropriate, to reduce your risk.

This is a natural progression in the evolution of long-term portfolio allocations. Coming out of the recession having an overweight to equities made sense. Then for the last few years as economic growth slowed and market valuations moved higher, being equal weight was more prudent. Now, 11 years into an economic expansion, taking some risk off the table allows us to better align market conditions with your goals.  The Wealth Advisors team is in the loop on these portfolio changes so that they can make any adjustments, if necessary, to your overall financial plan.  Rest assured that we do not anticipate any long-term planning changes of any significance at this time.

If the economy and equity markets continue to move higher, we will participate in the upside. At the same time, our slightly more conservative allocation provides us with a buffer if things don’t work out as positively as we would like. 

We will continue to monitor economic data and market conditions and communicate our thoughts on how it all relates to your individual plan. We pride ourselves on providing tailored, customized portfolios for each client. That allows us to make decisions that we think are best for you - not a boilerplate approach that suits everyone. At times like this, that level of customization becomes a huge benefit for every one of our clients and even more important, it drives the decisions that we make on your behalf. 

EV9 9498 Ben FrontofBloomberg

Benjamin W. Jones, CFP®, AIF®
President, Chief Investment Officer, Principal

240 South Pineapple Avenue, Suite 200
Sarasota, Florida 34236
Telephone (941) 365-3745
Toll Free (800) 926-5237

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