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Economists Expect the Fed to Cut Interest Rates. Markets Already Have.

The Federal Reserve will announce its decision on interest rate policy tomorrow. After raising rates throughout all of 2018, markets now anticipate the Fed to reverse course and begin cutting rates – if not at tomorrow’s meeting then very likely in July. Expectations for economic growth in the remainder of 2019 have moderated, and interest rates throughout the economy have already fallen substantially as a result. While the direction of Fed policy is extremely important, in many respects markets have been well ahead of the Fed this year.

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The Long Shadow of 2008

This weekend marks the tenth anniversary of the collapse of the Lehman Brothers investment bank, and with it the rapid descent into the global financial crisis. For many investors, it feels like only yesterday – and that fact may have implications for the next downturn, whenever it may come. 

What is the impact on investor behavior if the reference point associated with an economic recession is the near collapse of the global financial system?

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Aging Bull

According to recent headlines, this is now the longest running bull market in history. Although this statistic is much debated (short answer: they’re wrong but don’t get me started), there is no question that this bull market has been long. Age alone, however, is not a good way to evaluate the health of a market.

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“This time is different” for the Yield Curve?

The Treasury yield curve – a line chart displaying the current yields of U.S. Treasury securities at various maturities – is not a particularly widely-followed indicator outside of finance and economic circles. You won’t hear the current slope of the yield curve mentioned alongside the daily movements of the Dow and the Nasdaq on the evening news, for example. Over the last several months, however, the yield curve has received much attention, with pieces in the Wall Street Journal, New York Times, and NPR all tackling the implications of a “flattening” curve.

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Amazon didn’t kill Toys R Us. Not without a lot of help, anyway.

The knee-jerk reaction in this scenario is to blame Amazon for killing yet another traditional retailer, and for making the bricks-and-mortar approach no longer relevant in a digital world. In fact, in its bankruptcy filing this week, Toys R Us does just that – blaming Amazon, as well as Wal-Mart & Target, for its demise, stating that its three competitors created a “perfect storm” by slashing profit margins on the toys they sold over the last holiday season.

Amazon may very well be, in the words of a Bloomberg columnist, “Corporate America’s Nightmare.” But in this case, Amazon doesn’t get all the blame. While Amazon certainly hasn’t made life any easier for large-scale retailers over the last 20 years, the Amazon-effect ranks a distant second on the list of contributors to the downfall of Toys R Us.

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The Upside of Uncertainty

Today’s inauguration of Donald Trump as President of the United States serves as proof positive that yes, 2016 really did happen. A year full of improbabilities becoming realities served as a good reminder that since the future is inherently unknowable, a sound investment strategy should never be based simply on attempts to predict short-term events.

In the investment world, January is sometimes referred to as the “silly season”, when market prognosticators emerge from their dens to enlighten the world with their predictions of how the market will perform in the coming year. We’ve never placed any value in such prophecies, and we are not alone. In his 1992 shareholder letter, Warren Buffett noted that he and his business partner had “long felt that the only value of stock forecasters is to make fortune tellers look good.”

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Dow 20,000. Technically Not “Fake News”, But About As Useful

In the spring of 1999, after years of a hard-charging bull market, the Dow Jones Industrial Average first hit 10,000. It was a momentous occasion, and the many traders on the floor of the New York Stock Exchange celebrated with “Dow 10,000” hats. Little did they know that, sadly, those hats would again become relevant more than 10 years later, when the Dow would once again climb back to that notable level after plunging southward during the global financial crisis in 2008.

More than seven years on from that point, the Dow now stands poised to eclipse the 20,000 level. While its doubtful that many Dow 20,000 hats will be donned at the NYSE – only partly due to the fact that there just aren’t that many human traders left on the floor of the exchange – it is a significant milestone. Or at least it will be treated as such. In reality, the Dow index is a nonsensical measure that tells us virtually nothing of value about the market, and it is cited purely out of entrenched habit at this point.

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Elections, Volatility, & Markets

With alternating periods in 2016 of sharp volatility and relative calm, some people view this market like a high school relationship – they want to break-up with it before it breaks-up with them. Okay, there are certainly some scenarios on the horizon that will make investing temperamental, but typically the best way to handle those is as they are happening, rather than in anticipation of them occurring.

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Third Quarter Earnings Season Preview

Alcoa unofficially kicked off the third-quarter earnings season with a thud this week, reporting revenues and earnings results that both fell short of analysts’ expectations. The company’s stock fell sharply on the news, ending the day with a double-digit percentage decline. It remains to be seen whether the aluminum giant’s results are a harbinger of broader disappointments to come as U.S. companies begin to report their third quarter results. Once again, however, we find that the headline quarterly financial results for the market as a whole will likely not tell the entire story, and that by diving just a bit deeper into the results a slightly different picture begins to emerge.

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