Notes on the Week Ahead Dr. David Kelly

I have never been blessed with any skill in golf.  However, I do have some imagination and so I can imagine a situation in which I am lining up a long and difficult putt.  With well-justified humility, I wince as I strike the ball, knowing it will miss.  However, even two or three seconds after sending it on its way, I realize that, surprisingly, I’m still not sure how it will miss – I can’t quite tell if it’s going to miss to the right or to the left.  And so, of course, the ball trundles its zig-zaggy way up to the lip of the hole, pauses, and then topples in.
 
Last week’s GDP report ignited angst on both sides.  Some worried that the economy was slowing too much, with recession in the offing.  Others saw too much inflation, requiring an even more aggressive Fed campaign to squash it before it begins to reaccelerate in a serious way.

Since the advent of modern financial markets, bonds have always had the reputation of being conservative – rather like an elderly family lawyer in a leather-bound chair frowning at more jumpy and excitable stocks.  Bonds would never make you rich.  However, they would provide you with a moderate, steady and dependable income. 
This reputation was challenged in the 1970s and 1980s by Treasuries yielding more than 10%, in the wake of high inflation, and the explosive growth of the high-yield market.  In the decades that followed, yields drifted down in parallel with inflation but investor excitement was maintained by a steady stream of capital gains as well as income.  However, once monetary easing hit its peak in the days following the Great Financial Crisis, high-quality bond yields fell to levels that promised very little income and, at best, modest capital losses, assuming yields eventually recovered. 

Growing up in New England, our sons had a privileged childhood as sports fans and particularly as football fans. Between 2001 and 2020, the New England Patriots, coached by Bill Belichick and with Tom Brady at quarterback, competed in nine super bowls and won six of them -  a truly extraordinary performance in a league of 32 teams.  It is all the more impressive because of the NFL’s efforts to make the league competitive.  These include the salary cap, which forces all teams to spend roughly the same on their rosters, and the draft, which awards the top picks to the worst teams from the year before.
And yet the dynasty continued for almost two decades, with the Patriots winning many games that they should have lost due to their own confidence and their opponents doubts.  And the supposedly eroding effects of low draft picks seemed to have little impact on the team, as relatively unknown players found a way to win.

Next Monday, I once again get to lace up my shoes and join my friends from the Dana-Farber team in running the Boston Marathon.  This year will be particularly special, as both of our sons are also running the race.
One of the advantages of being an older member of the team, (and I can testify to plenty of disadvantages), is that you accumulate advice that you can share with younger members, particularly those who are running their first marathon.  One such piece of advice is to drink before you are thirsty and to eat before you are hungry.
By the time you are thirsty, when running a marathon, you are likely severely dehydrated and low on electrolytes, causing, at best, a sharp deterioration of your performance.  By the time you are hungry, your blood sugar will probably be too low, making the rest of the race slow and painful.  In short, in long-distance running, one key is to make decisions before it feels like you need too.

When I was nine, my father was elected to the Irish parliament and joined the new government.  Not long after that, my history teacher, a man of the opposite political persuasion, was expounding on the Norman conquest of Ireland and the attempts of the local Irish clans to wage war against them….”not like the “wage war” we have with the current government” he said, finding humor in a rather dull subject.  I, being an overly sensitive child, took this as a terrible insult to my father and promptly burst into tears, whereupon he sent me out into the hall for disturbing the peace.

This week, investors will be focused on the Fed’s second Federal Open Market Committee (FOMC) meeting of the year.  They are widely expected to make no change in interest rates.  However, Fed communications will provide guidance on two important subjects:  First, they will update their summary of economic projections and their “dot-plot” forecast for the federal funds rate.  Second, and particularly in Chairman Powell’s press conference, they will likely provide some further hints on when and how they could begin to phase out quantitative tightening.  While their messaging will likely continue to point towards monetary easing in the months ahead, the implied timing and extent of that easing could have major impact on markets.