A late-week loss cut into what would have otherwise been a decent week for the market. For the week, the Dow fell 0.3%, the S&P lost 0.2%, and the Nasdaq gained a slight 0.1%. Gold moved higher on the policy announcement from the Fed, up 2.8%. Oil saw a slight gain of 1.3% to $44.90 per barrel. The international Brent oil, used to make much of our gas here in the east, closed down to $48.49 per barrel.
Source: Google Finance
This week was all about the Fed.
We’ve talked about it for a while – this week held the meeting where the Fed would possibly change their interest rate policy. Rates have been at an emergency stimulus level for seven years now; so many investors believed the economy is doing well enough to move away from this policy. Any change would be very important for the market as it has had a big impact on the rise in stocks.
The days leading up to the Fed decision were rather uneventful as investors were hesitant to place any bets before the Thursday announcement. As you can see in the chart above, stocks became much more volatile once the decision was announced.
The Fed decided to keep their policy unchanged, continuing to hold rates at these record low levels.
Investors believed it would be a close decision, with the odds close to 50-50. Within the Fed, however, it wasn’t even close. The regional Fed members voted 9-to-1 to keep rates unchanged. One Fed member even wanted more stimulus.
The announcement to keep rates low would normally be good for the market but was instead met with confusion. The Fed’s explanation for keeping rates low added more uncertainties to the market – and the market hates uncertainty.
First, they discussed a weaker economic picture than many originally assumed.
Problems overseas were also cited as a reason for not raising rates, which is new territory for the Fed. The government has given the Fed a mandate for stable prices and full employment. Focusing on international events, like a weakening Chinese economy, is outside the Fed’s mandate. Basing economic policy on international events raised a few eyebrows.
A lack of inflation continues to be a concern for the Fed, too. They want to see inflation nearing its 2% target before hiking rates (even though higher inflation doesn’t lead to a healthy economy). However, an article from Bloomberg this week shows just how unlikely that is. In the last 20 years, we’ve only reached 2% inflation 26% of the time (using the Fed’s inflation metric). With that information, it looks like rates could be low for a long time.
We’ve talked about it for a while – this week held the meeting where the Fed would possibly change their interest rate policy. Rates have been at an emergency stimulus level for seven years now; so many investors believed the economy is doing well enough to move away from this policy. Any change would be very important for the market as it has had a big impact on the rise in stocks.
The days leading up to the Fed decision were rather uneventful as investors were hesitant to place any bets before the Thursday announcement. As you can see in the chart above, stocks became much more volatile once the decision was announced.
The Fed decided to keep their policy unchanged, continuing to hold rates at these record low levels.
Investors believed it would be a close decision, with the odds close to 50-50. Within the Fed, however, it wasn’t even close. The regional Fed members voted 9-to-1 to keep rates unchanged. One Fed member even wanted more stimulus.
The announcement to keep rates low would normally be good for the market but was instead met with confusion. The Fed’s explanation for keeping rates low added more uncertainties to the market – and the market hates uncertainty.
First, they discussed a weaker economic picture than many originally assumed.
Problems overseas were also cited as a reason for not raising rates, which is new territory for the Fed. The government has given the Fed a mandate for stable prices and full employment. Focusing on international events, like a weakening Chinese economy, is outside the Fed’s mandate. Basing economic policy on international events raised a few eyebrows.
A lack of inflation continues to be a concern for the Fed, too. They want to see inflation nearing its 2% target before hiking rates (even though higher inflation doesn’t lead to a healthy economy). However, an article from Bloomberg this week shows just how unlikely that is. In the last 20 years, we’ve only reached 2% inflation 26% of the time (using the Fed’s inflation metric). With that information, it looks like rates could be low for a long time.
Even though the Fed was in focus this week, we did see several economic reports worth noting. Retail sales ticked higher this month and the weekly jobless picture continues to improve.
On the other hand, Manufacturing in the New York region dropped to the worst level since April of 2009 and the Philadelphia region hit lows last seen in March, 2013. These numbers are worth paying attention to.
Next Week
This week was all about the Fed and they will be in focus next week, too. Fed chair Yellen will make a speech Thursday and investors will again be closely watching for any clues on future policy and maybe more discussion on the recent rate decision. Several other regional Fed presidents will be making speeches, as well.
As for economic reports, we’ll get info on housing, durable goods, and the final revision to second-quarter GDP.
Investment Strategy
Despite the weakness in stocks late this week, the announcement to keep rates low will likely give stocks some support in the coming weeks and months. In the very short term, prices are on the high side after the rise earlier this week, but it may be worth doing some buying if they come off further.
Looking out a little longer, the odds now see December as the next likely chance for a Fed rate hike. The drama we saw the last few weeks surrounding this rate increase will probably play out again the same way…and it will probably end in the same result from the Fed. This pattern repeats every time the Fed steps back from its stimulus, they just refuse to see it.
Looking at longer term fundamentals, we are concerned over the lack of companies reinvesting their earnings into their business. Money has instead flowed into stock buybacks and dividends, not reinvested back in the company. This signals lower corporate growth down the road.
Bonds prices fell (so yields rose) as money moved into stocks earlier this week, but this reversed course after the Fed announcement. We are likely to see low yields and high prices in stocks for some time, so we aren’t forecasting any major changes for bonds at this time.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low. Therefore, we keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues and when more stimulus looks likely and falling on the opposite.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets. However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged.
Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
On the other hand, Manufacturing in the New York region dropped to the worst level since April of 2009 and the Philadelphia region hit lows last seen in March, 2013. These numbers are worth paying attention to.
Next Week
This week was all about the Fed and they will be in focus next week, too. Fed chair Yellen will make a speech Thursday and investors will again be closely watching for any clues on future policy and maybe more discussion on the recent rate decision. Several other regional Fed presidents will be making speeches, as well.
As for economic reports, we’ll get info on housing, durable goods, and the final revision to second-quarter GDP.
Investment Strategy
Despite the weakness in stocks late this week, the announcement to keep rates low will likely give stocks some support in the coming weeks and months. In the very short term, prices are on the high side after the rise earlier this week, but it may be worth doing some buying if they come off further.
Looking out a little longer, the odds now see December as the next likely chance for a Fed rate hike. The drama we saw the last few weeks surrounding this rate increase will probably play out again the same way…and it will probably end in the same result from the Fed. This pattern repeats every time the Fed steps back from its stimulus, they just refuse to see it.
Looking at longer term fundamentals, we are concerned over the lack of companies reinvesting their earnings into their business. Money has instead flowed into stock buybacks and dividends, not reinvested back in the company. This signals lower corporate growth down the road.
Bonds prices fell (so yields rose) as money moved into stocks earlier this week, but this reversed course after the Fed announcement. We are likely to see low yields and high prices in stocks for some time, so we aren’t forecasting any major changes for bonds at this time.
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low. Therefore, we keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues and when more stimulus looks likely and falling on the opposite.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets. However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged.
Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
