Connecting the Dots: Economic Projections, Trail Mix, and Your Portfolio

In the course of our lives, there inevitably comes a time when we find ourselves in a profound state of self-reflection. During these moments, we may find that the very beliefs we once held so firmly, the preferences we thought defined us, or the tastes we confidently proclaimed, suddenly become subject to scrutiny and doubt.

As Coach Deion Sanders would say, “Your attitude will determine your altitude in life“. This is why I want to introduce a recent new addition into my life and that is trail mix. Throughout my 25 years of existing, I’ve sat at countless lunch tables, had tons of snacking time and have watched my friends eat wide varieties of snacks, and have different preferences. I mean shit my buddy brought the same lunch to school every single day. I digress..

Throughout this quarter century I have never once enjoyed eating Trail mix, it was never something that I would take off the shelves of the grocery store, would never grab it in line and wouldn’t even think about that disgusting dry waste of a snack. I mean who puts M&Ms with raisins and salty and sometimes cheesy other components.. this was just far too much for my young palette I guess..

Well.. I recently was desperate for a quick snack at my brother’s house and I opened his pantry and I saw nothing that I would prefer and all I saw was the Trail mix from Costco the Kirkland brand that comes in those little packets? I’m throwing in the towel.. I am reversing my position on Trail mix because to my surprise it was absolutely delightful. The combination of M&Ms with raisins and a little dash of almond was such a nice change of pace for someone who has always reached for the Flamin Hot ___ fill in the blank with anything and I’ll eat it. Seriously.. go grab yourself a bag of that Trail Mix it’ll have you thinking.

So why am I talking about Trail Mix you ask? Well I drew some parallels to the investing world that I thought would be interesting to dive deeper on. Just like in Trail mix, in investing there are different asset classes and investment types such as stocks, bonds, real estate, cryptocurrency, and sometimes even cash.. can be seen as the “ingredients” of an investment portfolio. Each ingredient (investment type) contributes to the overall flavor (performance) of the portfolio.

Understanding this will hopefully get you thinking about the why and the what but I want to get into why we diversify our wealth and why we don’t put all of our eggs in one basket, and that is due to the uncertainty of the monetary policy that is set by our Federal Reserve.

The Summary of Economic Projections (SEP)

Recently we had a retest of the main yearly channel in the S&P500 and there was some pretty serious fear in the markets. The selling pressure we saw this past week following the FOMC meeting was something that investors had not seen so far this year I would say.

So far we have had a pretty rosy year with equities far outperforming their start of year expectations. A stark change from the volatile days we were having last year with 3% days every few days. Why did we have that retest? Well it seems as though the market does not like uncertainty, I mean who does? Wouldn’t we all love to have a crystal ball that whispers stock tickers in our ears? After watching the Meta Connect this week, I’m getting hot-flashes of a CramerAI… just imagine “Hey Cramer”

All eyes were set on the Federal Reserve website on the afternoon of September 20th. As market participants we knew that the Fed would not raise rates at this FOMC meeting as the rate hike odds were showing a 99% chance of a pause. The main event was mostly the SEP and the speech that Powell would convey to the public. Mainly the questions that he addresses afterward - because at the time of the event the speech he is reading is always prewritten, something to remember if you are playing any short duration options.

What is the SEP?

The SEP, or the Summary of Economic Projections is a quarterly report that the Fed releases that involves the Federal Reserve governors meeting and submitting their projections of the most likely outcomes for real gross domestic product (GDP) growth, the unemployment rate, and inflation for each year from 2023 to 2026 and over the longer run. Each participant’s projections were based on information available at the time of the meeting, together with her or his assessment of appropriate monetary policy—including a path for the federal funds rate and its longer-run value—and assumptions about other factors likely to affect economic outcomes. These projections are keenly watched and taken into consideration by businesses, economists and investors when initiating any new positions and even when deciding when to close them.

The Dot Plot

Going to show a lot of data here and a lot of numbers it might look scary but trust me it is not lets stay on the left side of the table and just stay focused there. Every few months we have 19 members of the Federal Reserve essentially place their bets - (not really) but place their monopoly pieces down on a dot plot and that dot plot projects out their interest rate decisions and where they think the economy will be this year, next year and the year after as a gauge of short term economic growth and to assess appropriate monetary policy actions. Below I have laid out the June (Q2) projections and the newly released September (Q3) projections and the respective dot plot with it. Just imagine each blue dot as a Fed member.

Every three months, the Federal Reserve provides economic projections, including expectations for unemployment, inflation, and interest rates. Initially, they anticipated interest rates ending at the end of next year at 4.6%, which was considered good news as it implied a decrease from the current rates. However, they recently adjusted their projection to 5.1%, indicating two additional rate hikes. This shift is reflected in the "dot plot" where Fed members indicate their rate predictions. Previously, more members clustered around 4.25-4.45%, but now there's a wider range of rate projections, with a median increase of 100 basis points. Check the dots..

This uncertainty and optionality in the Fed's stance have led to market fluctuations. Despite projections of GDP increasing and then fluctuating, they're also saying unemployment is going to remain stable, and they also expect inflation to stay high and then return to 2.0%.

Questions arise about this scenario when the economy is performing well and unemployment remains unchanged. The Fed's approach appears to be about maintaining optionality and readiness for rapid change, creating uncertainty for investors and businesses. Ultimately, the Fed's strategy involves balancing demand and inflation control while leaving room for adaptability in an ever-changing economic landscape.

Just as the Federal Reserve policymakers aim to strike a balance between economic growth and inflation control, we as investors need to balance risk and return in our portfolios and that is what we saw this past week quite simply.

Has the Fed been reading some Graham lately?

Graham always spoke of keeping a margin of safety and I feel like I can draw a parallel to the Federal Reserve’s approach of maintaining optionality in the way its’ monetary policy decisions can be seen as a way to manage economic risk. By keeping their policy options open and remaining adaptable, the Fed is essentially creating a “margin of safety” for the economy. Assuming so that they can respond effectively to unforeseen economic developments, such as changes in inflation, employment, or global economic conditions. The Fed’s readiness to pivot in response to new information or events allows them to mitigate risks and stabilize the financial system.

What do I do with this information?

Diversification in investment portfolios is essential for managing risk and achieving long-term financial goals, particularly in uncertain environments. Imagine a well-balanced trail mix as an analogy—just as I mentioned before think of that Trail Mix from Costco. Just as the mix of the diverse ingredients of M&Ms, peanuts, almonds, and raisins can provide various flavors and nutrients, a diversified investment portfolio offers stability and growth potential. Think of the M&Ms as technology stocks, the peanuts and almonds as your index funds and the raisins as whatever you want—for me that would be energy companies. To create your recipe for financial success through diversification, allocate your funds wisely by determining how much to invest monthly, focusing on consistency. Consistency is the hardest part. When allocating investments in the stock market, divide your capital amongst different sectors, with around 20 well-researched stocks being sufficient. Invest in companies or industries you understand and believe will thrive over the long term. Look for value opportunities and “bargain bin” names in addition to pursuing dividend stocks.

Remember the importance of periodic portfolio review and rebalancing to adapt to changing circumstances. The suits do it why shouldn’t you - just as you might adjust trail mix ingredients to suit evolving preferences.

I like raisins now it’s so wild to me.. putting this at the end so no one knows.

What I read/watched this week?

• Crash or Boom: Week 2 Wrap-Up | Real Vision

• CNBC‘s Delivering Alpha Summit | Bill Ackman

• Is Amazon a Monopoly? | TCAF 111