As anticipated, the Federal Reserve (Fed) reduced expectations for future interest rate increases at its meeting last week. Risk markets rallied on the news, with the S&P 500 Index and Dow Jones Industrial Average recouping all of the losses from earlier in the year and crude oil pushing above $40 a barrel. The Fed's dovish change in tone puts the market in an interesting dilemma: Will more monetary stimulus drive stronger economic growth, or is weak growth domestically and globally requiring the Fed to be more dovish?
I continue to believe that U.S. growth is reasonable at a roughly 2-3% increase in gross domestic product (GDP). I also believe that significant financial strain remains in overseas markets. These two factors have a counterbalancing effect and exacerbate the volatile market action this year.
Given the stock market’s significant rally over the last month, I am becoming more cautious on performance going forward. I prefer to remain short interest rates with a bias toward fixed income of shorter maturities.
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