September 2019 Monthly Insight – Economic Trees

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Sep 1, 2019


“Come to the woods, for here is rest. There is no repose like that of the green deep woods. Sleep in forgetfulness of all ill.”

-John Muir, advocate for the preservation of wilderness in the U.S. known as the “Father of the National Parks

The Economy

On July 31, the Federal Reserve reduced the fed funds rate by ¼% to a target rate of 2.00 to 2.25%. It was the first rate cut since the financial crisis. Going forward, guidance was vague. While Chairman Powell left the door open to at least one more rate cut, it’s not assured.

The rate cut is not a response to a faltering economy. The Fed said, “Economic activity has been rising at a moderate rate.” Yet, in an 8–2 decision, the Fed said the cut was to “insure against downside risks from weak global growth and trade policy uncertainty.”

Falling interest rates in 2001 and 2008 failed to stem the outflow out of stocks as economic growth faltered. Rising rates between late 2015 and September 2018 didn’t squash the bull market. During the mid-1980s, mid-1990s, and late 1990s, rate cuts by the Fed, coupled with economic growth, fueled market gains. What was the common denominator that determined the direction of the market in all these instances? It was the direction of the economy.

Gross domestic product, which is the broadest measure of economic activity, slowed from Q1’s 3.1% annualized pace to 2.0% in Q2. While soft business spending is probably a reaction to the global slowdown and uncertainty caused by trade tensions, consumer spending rebounded sharply. Job growth is solid. First-time claims for unemployment compensation are low, the unemployment rate is below 4%, and consumer confidence is strong.

Maybe, just maybe, consumers aren’t paying attention to what’s happening on the trade front and are instead more focused on their own situation.

Focus on the Forest—Not the Trees

Your financial plan is comprised of many parts. These would equate to what Buffett calls the “economic trees.” Buffett writes, “A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty.” In other words, let’s not get too caught up on any one investment. No one can get every investment right, including Warren Buffet.

Instead, consider the forest. It contains diversity in trees, wildlife, and plants. It’s a work of beauty. Your portfolio is also diverse. It is built from the bottom up with your financial goals in mind. Buffett says, “At Berkshire, the whole is greater—considerably greater—than the sum of the parts.” He prefers to look at the bigger picture. We feel the same way about your financial plan.

How did the recent volatility in the S&P 500 Index sit with you? We use your input to gauge your tolerance for risk. If you found yourself fretting over the volatility, let’s talk. On the other hand, if you slept soundly, it would suggest your level of risk is on target.

Bottom Line

You can’t control the stock market or the headlines, and timing the market is not a realistic tool. But, you can control your portfolio. Your plan should consider your time horizon, risk tolerance, and financial goals. There is always risk when investing, but we tailor our recommendations to your individual situation. If you are unsure or have questions, let’s have a conversation. That’s what we’re here for.

As always, we’re honored and humbled that you have given us the opportunity to serve as your financial advisor.