-The Fed is dovish, which should make the markets happy
-This was a whirlwind of a week for a potential stimulus bill
-Election Day is coming up, and we’re expecting more volatility through the end of the year
Hi there—here is this week's update!
Fed minutes from last month's meeting were released this week. Here are some notes from the meeting:
-Reaffirmed outlook of holding rates near zero for years to come
-Goal of inflation reaching 2%, with it on track of exceeding the goal for some time
-Officials don't expect to reach those targets until 2023 or 2024
-Elevated concerns about financial stability if the recession is further extended
-The Fed suggested its guidance could change if there were other big economic or financial shifts
Simply put, the Fed expanded its dovish outlook further, without providing many additional details that investors are grasping for.
"Participants remained concerned about the possibility of additional virus outbreaks that could undermine the recovery," the minutes said. "Such scenarios could result in increases in bankruptcies and defaults, put stress on the financial system, and lead to disruptions in the flow of credit to households and businesses."
Generally, statements like this are good for the markets because it affirms that the Fed is willing to be a backstop if the situation worsens.
While the Fed deals with monetary policy, Congress deals with fiscal policy, which includes the federal government's tax and spending policies.
To see a real change in unemployed Americans' households, a stimulus bill from Congress is the only thing that can make a real, immediate difference.
This week took a dramatic turn, where on Tuesday, Trump had pulled out his negotiators and later demanding separate bills. By Thursday, talks were back on, and by Friday, Trump endorsed an even bigger stimulus proposal.
With Election Day coming closer and closer, we imagine both sides will be pushing to make a deal; however, we will likely see volatility continue until a deal is finalized.
Expected volatility and our outlook
We expect the markets to continue to be pretty choppy for the remainder of the year.
Government officials seem to be driving the markets, more so than economic data. This can lead to further inconsistency in asset pricing, making it more difficult to make high conviction bets.
We continue to like select assets that have two properties:
1) Growth that can outpace a low growth environment
2) Value, relative to government manipulated assets.
This means public stocks that have the potential to grow at a faster rate than their counterparts. On the fixed-income side, we like securitized credit like CLOs. Lastly, we like alternative assets/strategies that have higher expected returns for their risk profiles.
See you next week,
-Saul & The Round Team
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