The market ticked down just a touch last week, but the big news happened over the weekend. This week will show how the market reacts to the bombing of Iran’s nuclear facilities. Historically, markets have responded with a small drop and a large rebound, setting new highs. Of course, nothing has been settled in this conflict. It’s always important to keep the long view in mind, and focus on fundamentals: are companies making goods and services that people want to buy? Are they well managed? Are they generating revenue and profits?
Of course, I read three different analyst opinions this weekend. Two said the S&P will reach new highs this year, with one calling for a 20% gain over the next 12 months. Another said we are plunging into a recession any day now. If the so-called experts can’t agree on the next 12 months, that’s a good sign you should be investing, and thinking about your investments, over a much longer period.
This uncertainty is also impacting the Federal Reserve Bank. The Fed’s Board of Governors sets the federal funds rate, which is the target interest rate that banks use for overnight lending to maintain their reserves. This rate, in turn, serves as a benchmark for consumer interest rates. For example, a loan or credit card may charge interest at the fed funds rate plus a certain percentage.
The Federal Reserve Bank is the United States’ central bank and it has a unique position among the world’s central banks, with what is called the dual mandate. Other countries’ central banks are only concerned with price stability, which is measured by inflation. In the US, the Fed has a target rate of 2% average inflation. In addition to price stability, the Fed also works to ensure maximum employment, which is the highest level of employment without triggering inflation. While they do not have a fixed target, an unemployment rate of just over 4% is generally considered maximum employment.
Right now, inflation is slowly coming down. For 2024, it was an average of 2.9%, and as of May had declined to 2.4%. Unemployment has been hovering just over 4%. All of this sounds great, and that the Fed should be considering cutting interest rates. At their last meeting, the Fed again held rates steady. There’s too much uncertainty right now. The potential impact of tariffs, the spread of the conflict in the Middle East, the impact of federal spending cuts on unemployment rates. Until they have more data, the Fed is in a holding pattern.
If you’re in the fortunate position of having cash on hand, put it to use in a High Yield Savings Account or Money Market, to earn a higher interest rate. If you have consumer debt like credit cards or higher-interest car loans, pay those down as quickly as possible, focusing on the loan with the highest interest rate first.
Your action item this week is to check the expiration date on your sunscreen. Or just buy new bottles as we head into summer.
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