Content provided by J.J. Schenkelberg, CFA, CLS Senior Portfolio Manager
I think we have all experienced this at some point: We go to the store, proceed to the checkout counter, and face the daunting choice of which line to enter. We pick one and stand there waiting in uncertainty. Every movement begs the question: Should I switch to the other line? We scope out which individuals look the most efficient and have the fewest items. In my experience, I am typically plagued with the knowledge that whatever line I choose, it will inevitably be the one that summons the manager when it’s too late to switch, despite the fact that I specifically chose the over-21 cashier to avoid these situations.
This feeling of uncertainty is very similar to the market’s anticipation of a hike in the federal funds rate. Current federal funds futures point to the first rate rise in October, up from December, following strong nonfarm payroll data. During ECB discussions this week regarding Greece’s debt, Christine Lagarde, current managing director of the International Monetary Fund, pleaded to the Federal Reserve to wait until 2016 before proceeding with the first rate hike.
Every news event from the U.S. to Greece seems to tie to expectations of this event, and the market is currently reacting to each one. Which line should we be in? September, October, December, January??? The fact is we don’t know how quickly it will come, but eventually the Federal Reserve will institute the first rate hike. Being prepared for all market conditions regardless of when this occurs is what a globally diversified portfolio aims to accomplish. We will reach the cashier eventually, and then the uncertainty accompanying the anticipation will be forgotten. But until then, we’ll still be looking for the best line.
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