Learn about what to expect from the markets and the multi asset approach to navigating them under new FOMC and Fed leadership with Dr. Brian Jacobsen.

 

Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®. With new leadership at the Fed [Federal Reserve] and FOMC [Federal Open Markets Committee], which is the policy-making body, investors wonder what to expect from the markets and how to navigate them. Here with his perspective is Dr. Brian Jacobsen, Senior Investment Strategist with the Wells Fargo Asset Management Multi Asset Solutions Team. Welcome Brian.

Brian Jacobsen: Thanks for having me.

Laurie: As we had done in part 1 of this program, we encourage our audience to visit our AdvantageVoice® blog—specifically the November 2 post—to see the charts Dr. Jacobsen created which compare the economic environments under the previous four Fed Chairs. But today, Brian, let’s pick up this conversation where we left off talking about the changes afoot at the Fed and start with a point you made in your blog post about the value of communication from the Fed and how it nudges the markets.

Brian: I think one of the key things we have seen, since maybe even beginning before the financial crisis, has been almost a tidal shift in the way monetary policy has been conducted across the developed world. When Chairman Bernanke was Fed Chair, he started walking down this path of realizing that communication matters. And Jerome Powell, I think, is going to walk in those footsteps and perhaps actually underscore the importance of that communication. And I think he’s going to really emphasize the importance of clear communication, but also backing it with action to build credibility.

Laurie: And so how do you think this might nudge the markets one way or another?

Brian: You know, since 2015, it seemed like the Fed started off with almost high hopes of how quickly they could raise rates, and the market was always skeptical. And the Fed eventually sort of ratcheted down their rhetoric to meet more where the market was as far as the number of hikes. But if you actually get people who are more hawkishly-inclined, that is they’d rather speed up the pace at which you get to normal and neutral interest rates, as the Fed sometimes refers to them as, you could, I think, actually see a slight shift. Instead of having the Fed ratchet down their statements to meet market expectations, I think you’re actually going to see that market expectations need to rise to better meet the Fed rhetoric.

Laurie: So that means higher rates, right?

Brian: That would mean, I think, a slightly higher level of rates. Now, I do have to qualify, this is all on the margin. We’re probably talking about maybe one percentage point. That’s why I’m not too worried about it—that the Fed is going to get so hawkish that they are actually going to choke off economic growth; that they are going to pose some sort of existential threat to the health of this bull market that we’ve been enjoying in equities. But, it is something that could be a slight headwind.

Laurie: I mean just to be clear, right now the summary of economic projections—their long-run estimated fed funds rate is still just under 3%, so, it would still be around 3% is what you’re saying.

Brian: That’s right. So these are just small shifts. But I think as most people have recognized in a complex system, like in the financial markets, even a small shift can have big effects, especially in the short term.

Laurie: So as a multi asset class strategist, how are you approaching this?

Brian: The way I look at it is, it can affect things sort of on a tactical perspective, but not necessarily on a strategic perspective. Tactically, I think that it means that in 2018 we could see, perhaps, the dollar strengthen a little bit. For a lot of 2017, we’ve seen the dollar weaken. Maybe we see that reversing a little bit. That means, from a global allocation, is that it tends to favor, for a U.S. based investor, more U.S. based investments—in U.S. equities relative to non-U.S. equities. But just at the margin. On the fixed-income side, I think that it means that we could see the short-term interest rates move up, that means cash might yield a little bit better than what it has over the last few years, I think some people might like that. But it also means that with the treasury market, we could possibly see a little bit of headwind toward some of the returns that we have seen over the last few years. If you see those treasury yields begin to rise, I would tend to favor, in the fixed-income market, taking on more of that investment-grade credit risk. Maybe higher-quality, high-yield risk where there’s at least a little bit of a cushion to absorb a move up in treasury yields.

Laurie: Brian, we’ll end on that. We encourage our listeners to get more from Dr. Jacobsen on our blog AdvantageVoice® and to learn more about our investment strategies at wellsfargoassetmanagement.com. For now, Brian, thank you.

Brian: Thanks so much for having me.

Laurie: Until next time, I’m Laurie King; take care.

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