As the market eagerly anticipates the next rate cut, and the news of whether it will occur in October, the psychological pressure of missing out could entice investors to put more chips on the table. Despite the Liberation Day volatility and the persistent news of a softening jobs market, the markets have enjoyed a solid year-to-date as I write this in early October. Some of this is due to the anticipation of lower borrowing costs on a forward-looking timeline and an end to restrictive monetary policy. Inflation and jobs numbers are key factors in the decision the Fed makes with their interest rate policies due to their dual mandate of price stability and full employment. The CME Fed Watch Tool is currently showing a 94.6% chance of another rate cut at the next meeting as I write this on October 9.[i] With the news of likely cuts through the fourth quarter, investors may feel the urge to add risk to avoid missing potential gains.
Regret aversion can take many forms, but at its core, it is the powerful psychological tendency to make decisions now specifically to avoid the predicted pain of future regret. For example, let’s say an investor that experienced a correction during the initial COVID market shock and went to cash in anticipation of a long-term down economy. They stayed in cash for years and are now thinking of going ‘all in’ to recoup much of the lost potential in the last five plus years now that they hear interest rates are working their way back down again. Or maybe it was not COVID, but Liberation Day. It could cause an investor to take on heavy risk in anticipation of the regret of missing out a second time.
While there may be much anticipation of more Fed cuts, it is a crucial factor in the reasons for the cuts alongside historical market reactions. While equity markets typically perform well when the cut is to sustain economic growth, recessionary cuts can signal weakness in the economy. As I wrote in last month’s Advisory Monthly, there have been significant job revisions that suggest employment is not on as good of footing as it was thought to be just a few months ago. There is still some trade uncertainty that may impact inflation. Markets are complex and it is difficult to know second or third order consequences of adding significant risk in an attempt to time a rally.
As we know, time in the market typically beats timing the market over a long-term horizon. It is difficult to know how negative or positive economic news will reflect across equity markets. As always, it’s important to have clients looking at long-term goals and how they are tracking toward that vs short-term market expectations. The well-established axioms of dollar cost averaging, rebalancing, and focusing on the long term is as important now as they have been in the past.
I hope everyone has a great October and enjoys the start of the holiday season.
[i] https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
