Finally, the U.S. Federal Reserve faces one of its most complex decision sets in decades. On one side, inflation is cooling, real rates are restrictive, and the economy risks overcooling given the long lags of monetary policy still working through the system. On the other side, services inflation remains sticky, wage growth is still elevated, and premature interest rate cuts carry the risk of reigniting inflation at a time of renewed housing strength and excessive fiscal stimulus. The Fed is balancing the risk of staying tight for too long against the risk of easing aggressively too soon. Either direction carries meaningful consequences for growth, credit markets, and asset valuations.
In the face of this uncertainty, the goal of the advisor shouldn’t be to make predictions of how markets will play out. Advisors need to stay focused on what they can control: how they can enhance the client experience and where they can add value to help investors better reach their goals. We believe that the best way to accomplish this in any environment, let alone an uncertain environment, is through better portfolio construction. A resilient portfolio is one that can help investors reach their financial goals with greater certainty. And a resilient portfolio needs to take advantage of what Henry Markowitz is generally credited with saying, “proper diversification is the only free lunch in finance”. While the concept of diversification is quite straight forward, it requires a willingness to explore new ideas and to think about portfolios as collections of return streams as opposed to traditional asset classes.