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Weekly Market Commentary
October 3, 2016

The Markets

Markets were relatively calm during the third quarter of 2016, yet they delivered some attractive returns overall.

In the United States, all three major U.S. indices posted record highs twice during a single 7-day period in August, reported CNBC.com. The Standard & Poor’s 500 Index (S&P 500) experienced a 51-day streak without at least a 1 percent decline. The index returned 3.3 percent in the third quarter.

Weekly Market Commentary
September 26, 2016

The Markets

As expected…

The U.S. Federal Reserve left rates unchanged last week and markets celebrated. Across the globe, national stock market indices finished the week higher. In the United States, the Standard & Poor’s 500 Index and NASDAQ gained more than 1 percent.

Not everyone was thrilled with the decision, however. Three Federal Reserve presidents cast dissenting votes. All believed interest rates should move higher. That’s the most dissents since December 2014 when even the dissenters were divided about what should happen.

Proceeding with caution is the right approach, according to Barron’s:

“A rate hike is usually aimed at preventing an economy from overheating, and there’s no sign of that – not even close. Housing activity has been disappointing, wholesale inflation is weak, retail sales are declining, and manufacturing activity is slowing. Such a confluence of negative data has never stopped the Fed from tightening rates – the central bank did so in December, even though the economic data looked even worse than it does now – but it isn’t exactly screaming for immediate action.”

Weekly Market Commentary
September 19, 2016

The Markets

If it’s not one thing, it may be another.

Economic data released last week will factor into this week’s Federal Open Market Committee (FOMC) decision on whether to push interest rates higher in the United States. Some of the August data supports the idea economic growth was soft. For example, August retail sales fell more than expected, down 0.3 percent from July. Other data was as expected: U.S. producer prices were flat, which was in line with expectations.

However, the kicker may be inflation. It increased during August, “…offering fresh evidence that U.S. inflation may be firming after years of sluggish price growth,” wrote The Wall Street Journal. The Consumer Price Index, which is a gauge of inflation, rose more than economists had expected in August in large part because of higher healthcare costs, according to Reuters.

Summary and Conclusion:

Volatility in asset markets declined from the post BREXIT increase following assessments that the effect of the outcome of the vote on the world economy would be inconsequential, at least in the short-run. I believe that volatility will pick up during the next few months. Following Chair Yellen’s remarks at Jackson Hole, market participants now have a wider dispersion of views concerning the path of interest rates over the next three months. Thus, a greater share of market participants will be disappointed with the Fed’s interest rate decisions. The consensus of economic forecasters (including voting members of the FOMC) projects a bounce-back in the U.S. economy with economic growth during the second half of the year in the 2.5-3.0 percent range. I believe they will be disappointed in the outcome. The relationship among the members of the House, Senate, and the Administration has not improved. (They can’t even pass a bill to address the funding of a program to combat the Zika virus.) The three parties are struggling not only to reach agreement on Agency spending bills, but cannot reach agreement thus far on a continuing resolution if they can’t pass a budget. This level of uncertainty will cause risk-averse bureaucrats to hold-back spending, leading to a negative fiscal shock to the economy. During the next few months, the U.S. Presidential elections will come into focus. Regardless of the outcome, the result will be the inauguration of a very unpopular President in January of 2017 and a Legislature that will be reluctant to support the agenda of the inaugurated President. The resulting uncertainty of the path of macroeconomic policy as well as tax policy will result in heightened volatility in asset markets.

Weekly Market Commentary
September 12, 2016

The Markets

Blame it on the central banks!

After 44 consecutive sleepy, summer days when Barron’s reported the Standard & Poor’s 500 Index opened and closed without a 1 percent move in either direction, the index tumbled last week – and so did indices in other markets around the world. What roused investors from complacency? Some experts pointed their fingers at central banks:

“Three central banks announced their monetary policy decisions during the week and all three maintained the status quo and did not change policy. The news disappointed the markets – they were looking for more stimulus. And, in some cases, good economic data was interpreted as bad news because it meant that there was less of a probability of more stimulus.”

The U.S. Federal Open Market Committee doesn’t meet until September 20, but markets reacted sharply after Boston Fed President Eric Rosengren (whom Thomson Reuters labels as a dove) said, “My personal view, based on economic data that we have received to date, is that a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy.” After his speech, Reuters reported the odds of a September Fed rate increase rose from 24 percent to 30 percent.

Weekly Market Commentary
September 6, 2016

The Markets

“We can never know about the days to come, but we think about them anyway…”
--Carly Simon

Economists and market analysts have been thinking a lot about the Federal Reserve and the actions it may take before the end of 2016. Friday’s employment numbers helped fan the speculative fire. The U.S. Labor Department reported the unemployment rate remained at 4.9 percent with 151,000 jobs added during August.

The broad market consensus was 180,000 jobs would be created, according to MarketWatch. The publication cited a source as saying the report, “…wasn’t strong enough to force the Fed to raise rates in September, but it also wasn’t weak enough to raise concern about the U.S. economy or dampen the outlook for corporate earnings. As such it’s a mildly dovish report…”

Economists and political leaders also are thinking a lot about the impending British exit from the European Union (EU). At the G20 Summit – a forum for government and central bank leaders from 20 countries – British Prime Minister Theresa May confirmed, “Brexit means Brexit.” However, the BBC reported there remains a general lack of agreement within the British government about exactly what the country’s relationship with the EU should be after Brexit.

Weekly Market Commentary
August 29, 2016

The Markets

Attention investors: U.S. interest rates may be moving up and it might happen this year.

During last Friday’s speech at the Federal Reserve’s annual economic symposium in Jackson Hole, Wyoming, Fed Chairwoman Janet Yellen signaled that a rate hike is probably coming but, as usual, she didn’t offer any specifics about the timing:

“…Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook.”

There’s a good chance the increase could occur during 2016. Goldman Sachs economists, cited by Bloomberg, said the subjective odds of a September rate hike increased from 30 percent to 40 percent last week. Bloomberg’s data suggests a 65 percent chance of a rate hike by December.

Weekly Market Commentary
August 22, 2016

The Markets

Last week, Wall Street was speculating about monetary policy with the enthusiasm of commentators trying to predict who will bring home Olympic gold.

The Federal Open Market Committee (FOMC) is expected to introduce another rate hike before the end of 2016, according to the BBC, and it has just three opportunities to deliver the goods – during its September, November, or December meetings.

Analysts and pundits parsed minutes from July’s FOMC meeting looking for clues about timing and found relatively few because there was no consensus view at the July meeting. The BBC wrote, “According to the minutes, some FOMC members felt ‘economic conditions would soon warrant taking another step,’ while others believed more data was needed.” The BBC also pointed out a hike in November was unlikely because of the timing relative to the U.S. Presidential election.

The sooner-is-better camp inside the Fed has been quite vocal recently. CNBC reported New York Fed President William Dudley, Atlanta Fed President Dennis Lockhart, and San Francisco Fed President John Williams each made statements confirming solid economic growth is expected during the second half of 2016, and indicating it’s time to continue increasing interest rates in the United States.

Weekly Market Commentary
August 15, 2016

The Markets

How do you measure stock market valuation?

If you look at conventional measures – like price-to-earnings (P/E) ratios – then U.S. stock markets appear to be pricey. The Wall Street Journal reported trailing 12-month P/E ratios are high when compared to 10-year averages.

High P/E ratios haven’t dampened investors’ interest in U.S. stocks, and share prices have been moving higher. The Dow Jones Industrial Average (Dow), Standard & Poor’s 500 Index, and NASDAQ all reached new highs last Thursday – the first time that has happened since 1999.

Barron’s suggested investors’ enthusiasm for stocks is rooted in the search for yield. “With the Treasury’s 10-year note yielding 1.5 percent – near lows not seen before in modern history – there’s no alternative to stocks for investors who want returns.” Of course, that’s a bit of hyperbole since there are many types of investments that offer income to investors. Let’s focus on stocks and bonds, though.

Summary and Conclusion:

Volatility in asset markets picked up following the outcome of the BREXIT vote which registered a desire of the majority of voters to leave the European Union. (The United Kingdom had previously decided against being a member of a closer Union of European States by declining to join the Euro Area and to adopt the euro as its currency.) Once asset markets had priced in the effect of the outcome of the vote, volatility returned to the benign level of the preceding few months. With the exception of the 10 percent depreciation of the pound-sterling, the effect of the outcome on asset markets was minimal. China, Brazil, Saudi Arabia, and Russia have managed to minimize fluctuations in their international reserves, so I conclude that, absent a significant shock, markets should continue to exhibit this reduced level of volatility through August. Once the U.S. Presidential elections come into focus and the failure of Congress to resolve Federal budget issues becomes news, the autumn months should usher in a return of greater asset price volatility.