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The Enigmatic Markets Strike Again!

The markets dropped on the news that the Federal Reserve would not be raising interest rates. Yet, only months earlier and in the years following the Financial Crisis, such news would have been met with glee and likely caused the markets to go higher. By keeping interest rates low, the Fed was allowing borrowers to borrow at ultra-low rates, whether on the corporate or individual level. Getting the funds, especially at the individual level, was a different story – but if you were lucky enough to get approved for a loan, you would be paying relatively nothing for borrowing the money.

The low rates on savings and fixed income investments also made stocks and other perceived riskier assets more attractive. It’s easy to see that if say, McDonald’s is paying a 3% dividend, while a 10-year Treasury is only paying 2%, McDonald’s stock (like its french fries) looks a little more yummy. These low rates also let companies and those lucky individuals alike refinance their debt. Low costs of capital allowed companies to borrow money at historically low rates, and then repurchase their shares in the open market. Supply and demand forces kicked in as the supply of companies’ shares dwindled, while the demand for them remained relatively steady and probably increased as investors searched for yield. This materialized in share prices going higher.

Still, low rates were necessary for an economy on the mend and to stabilize a recovering financial system. The low rates were necessary. Yesterday showed that the perception has turned and that the low rates now carry a negative connotation as they are needed to avoid a recession and keep a steady economy steady. In just a few months, low interest rates have become a cause for concern instead of a cause for celebration.
The markets are an enigma and often hard to explain.There are many reasons why the Fed did not raise rates. Among them include a strengthening dollar and stubbornly low inflation rates (at least those rates used by the Fed). If the dollar were to continue to strengthen, the government would have to send more valuable dollars over to China, Japan, and other countries and institutions holding U.S. debt instead of using that increased value to invest at home. The strong dollar also impacts corporate earnings for those companies with significant operations overseas. This could weigh on stock prices as earnings decline. Second-order effects include lower values in IRAs and 401(k)s, followed by less wealth, less spending, and a stalling economy.

In short, people are always confused by the swings in the market and they should be – many times the so-called experts can’t explain them. When they try to predict them, they often find themselves stumped and coming up with new reasons to justify what just happened. I didn’t know if the Fed was going to raise rates or not; I had an opinion, which I would like to think of as informed, but in the end I wouldn’t bet any of my money on Fed interest rate decisions. Warren Buffett thinks the same and invests with an agnostic view towards rates.

In light of this, take a long-term view and do not get caught up in the vicissitudes of the market. If you’re looking for an advisor, find one that is humble and doesn’t think he or she can predict market movements and interest rate decisions. There are a slew of Ph.D's and Nobel Prize winners trying to do this, and they don’t have that good of track records. So if an advisor is trying to tell you where the market is headed, take it with a grain of salt as his or her opinion is worth virtually nothing and you’d be better off flipping a coin to get a better answer.

- Andrew Sebastian

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