Broker Check

October 1, 2018

| October 08, 2018
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The Federal Reserve raised rates for the third time in 2018, as expected, and is now targeting a rate between 2 percent and 2.25 percent. The accompanying graphic shows the Fed has increased rates steadily and inflation is very close to the Fed’s 2 percent target. On Friday, the data showed August was the fourth month in a row inflation rounded to 2 percent.

While inflation has increased, the Fed does not see any inflationary pressures that would provoke an unexpected interest rate hike. The Fed feels the current path of gradual hikes is still appropriate to keep the economy balanced between over-heating and faltering. This language suggests a December rate hike is very likely.

In addition, the Federal Open Market Committee projects economic growth will continue for three more years, although its median numbers show growth slowing from 3.1 percent in 2018 to 1.8 percent in 2021. (Remember, forecasts, no matter how venerable the source, are best guesses and not bedrock.)

Investors weren’t enthusiastic about the Fed’s actions or its expectations, and the onset of United States-China tariffs didn’t lift their spirits. Ben Levisohn of Barron’s explained:

“The Dow Jones Industrial Average dropped 285.19 points, or 1.1 percent, to 26,458.31 on the week, while the S&P 500 fell 0.5 percent to 2913.98. Neither could be considered life threatening, and the S&P 500 still rose for a sixth consecutive month. So, while we need something to blame, we needn’t get too worried. Last Monday kicked off with the implementation of tariffs by the United States and China and continued with a Federal Reserve rate hike. Neither was a surprise, though the Fed might have caught a few napping when it removed the word ‘accommodative’ from its statement.”

What does it mean when the Federal Reserve removes the word ‘accommodative?’

The Fed pursues ‘accommodative’ or ‘easy’ monetary policy when it is encouraging economic growth. Accommodative policy may include lowering interest rates or, in unusual circumstances, quantitative easing.

By removing the word, the Fed may be signaling that policy will be ‘tightening’ in an effort to prevent the economy from overheating, reported Sam Fleming of Financial Times. There is debate about whether rates are at a neutral level; one that won’t cause the economy to run too hot or too cold. Let’s hope for a Goldilocks economy.

U.S. stocks wrapped up September with a slight decline but finished positive for the third quarter. The S&P rose 7.2 percent in the third quarter, its best quarterly performance since the end of 2013.

 

Key points for the week

  • As expected, the Federal Reserve raised rates 0.25 percent and removed the word “accommodative” from its policy description.
  • The Fed signaled rate increases would continue at a steady pace.
  • The S&P 500 posted its strongest quarter since 2013.

 

What are we reading

Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.

 

House Passes Tax Reform 2.0

Three bills were passed by The House last week: The American Innovation Act, The American Innovation Act of 2018 and The Family Savings Act.  However, it will be difficult for the bills to pass the Senate. Key provisions include:

  • Increase access to employer sponsored retirement plans through multiple employer plans
  • Creation of a new Universal Savings Account
  • Expand 529 plans
  • Makes the individual tax cuts from the 2017 Tax Cuts and Jobs Act permanent
  • Increases amount new business write off for start-up costs

 

Credit Freezes Now Free

Effective September 21, 2018, freezing your credit will now be free. Security freezes prevent criminals from using stolen information to open fraudulent accounts in your name. All consumers should consider freezing their credit with the three credit reporting bureaus: Equifax, Experian, TransUnion and Innovis. Note that you must unfreeze your credit report if you go to apply for new credit or a loan. Visit https://www.identitytheft.gov/CreditBureauContacts for links to freeze your credit with each bureau.

 

Injured Turtle Gets Custom LEGO®Wheelchair

An injured turtle was recently discovered in Druid Hill Park, Maryland and taken to the Maryland Zoo’s animal hospital for help. The turtle had multiple fractures on its shell, but since there aren’t mobility devices small enough for turtles, the zoo doctor decided to make the turtle a wheelchair out of LEGOs® to keep its shell off the ground. The turtle has adapted well to life with a wheelchair and will be released back into the wild once it has healed.

 

When do you behave the most like yourself?

Don’t worry. This isn’t about soul-searching and trying to find answers to existential questions like, ‘Who am I?’ or ‘What is my purpose?’ or ‘How should I live my life?’

Nope. This is about a science experiment!

Ian Krajbich of Ohio State University and Fadong Chen of Zhejiang University in China wanted to better understand how people made social decisions, according to a paper they published in Nature Communications. They began with the premise that “Social decisions typically involve conflicts between selfishness and pro-sociality.”

Then, they asked 200 students in the United States and Germany to play “mini-dictator games in which subjects make binary decisions about how to allocate money between themselves and another participant.”

Science Daily explained, “In some cases, participants had to decide within two seconds how they would share their money as opposed to other cases, when they were forced to wait at least 10 seconds before deciding. And, in additional scenarios, they were free to choose at their own pace, which was usually more than two seconds but less than 10.”

The upshot was people who were pro-social became more pro-social, and people with more selfish instincts became more selfish, under severe time constraints. Given more time, “pro-social subjects became marginally less pro-social under time delay…while selfish subjects became less selfish under time delay…though these effects are less pronounced.”

Maybe you behave most like you when you’re pressed for time.

 

Weekly Focus

“Don’t count the days, make the days count.”

~ Muhammed Ali

“The way to get started is to quit talking and start doing.”

~ Walt Disney

“Selfishness is not living as one wishes to live, it is asking others to live as one wishes to live.”

~ Oscar Wilde, Irish poet and playwright

 

Links & Disclaimers

RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein.  There is no assurance any of the trends mentioned will continue in the future.  Any opinions are those of the author and not necessarily those of RJFS.  Any expression of opinion is as of this date and is subject to change without notice.

Opinions expressed are not intended as investment advice or to predict future performance.  Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.  Past performance does not guarantee future results.  Investing involves risk, including loss of principal.  Consult your financial professional before making any investment decision.  Stock investing involves risk including loss of principal.  The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.  The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal.  Please note direct investment in any index is not possible.

The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks.  Investing in emerging markets can be riskier than investing in well-established foreign markets.

Links are being provided for information purposes only.  RJFS, SPC and S&M are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors, and they are not responsible for the content of any website, or the collection or use of information regarding any website's users and/or members.

 

https://www.ft.com/content/635daa64-c1ac-11e8-95b1-d36dfef1b89a

https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20180926.htm (Table: Change in real GDP)

https://www.barrons.com/articles/dow-drops-1-1-on-week-as-tariffs-fed-take-their-toll-1538182108

https://www.investopedia.com/terms/a/accomodativemonetarypolicy.asp

https://www.nature.com/articles/s41467-018-05994-9

https://www.sciencedaily.com/releases/2018/09/180904140530.htm

https://www.brainyquote.com/quotes/oscar_wilde_106085?src=t_selfishness

https://www.cnbc.com/2018/09/25/fed-expected-to-raise-interest-rates-and-signal-more-hikes-are-coming.html

RJ Approval # 2266874

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