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It was inevitable that following an unusually quiet August - one in which volatility was almost non-existent - that September would be rough.
What is a little surprising, however, is that the catalyst for recent volatility has been the Fed, and the many mixed signals being sent, often times on the same day. On the 9th, for example, one regional Fed President signaled the need to raise rates while another said not so fast.
In reality, the Fed has lost a lot of credibility, and it is becoming clearer that fiscal policy (e.g., infrastructure spending) must come to the rescue to help keep the economy growing.
The Fed has boxed itself in by being so wishy-washy, and may end up raising rates in September to save face, even if it really doesn't want to, and even with the risk of inserting itself into the middle of the election.
The market is reacting more to the Fed and its wavering then it is to real consternation over a small interest rate hike. After all, raising rates is actually a postiive signal that the economy is growing, and should translate into higher corporate profits. In addition, the Fed continues to make it clear that when it does tighten, it will raise rates slowly and in an orderly fashion.
Once the dust settles, and the September Fed meeting is over, things should settle down as the reality sets in that our economy, though not going gangbusters, is still leading the global pack.
As always when we see volatility, communicate with your clients and help keep things in perspective. If history is any guide, the Santa Claus rally is just around the corner!
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