It was a mixed week for the markets. Through Friday’s close, the Dow rose 0.4%, the S&P was flat with a gain of just 0.08%, and the Nasdaq was lower by 0.3%. Bond prices continued their steady decline (as yields rose). Gold was also lower for another week, off 1.8%. Oil prices were again higher, up 1.5% to $50.66 per barrel. The international Brent oil moved higher to close at $56.90.
Source: Barchart.com
Stock markets again reached new record highs this week, but the gains were only modest. All eyes were on a Fed policy meeting Thursday and investors were reluctant to place any big bets before this meeting.
First, a little background. After the financial crisis in 2008, the Fed embarked on a massive stimulus program to boost the economy. They wanted to push interest rates lower to make it easier to take on debt and get a mortgage (apparently they view the best way to recover from a housing bubble is to reflate the bubble). They lowered some rates to zero, while printing money to buy bonds and lower other borrowing costs, like mortgages.
The bonds they purchased are counted on their balance sheet. Years of stimulus pushed the balance sheet to a massive level of $4.5 trillion. The image below shows how the balance sheet has grown not just here, but at other central banks around the world.
First, a little background. After the financial crisis in 2008, the Fed embarked on a massive stimulus program to boost the economy. They wanted to push interest rates lower to make it easier to take on debt and get a mortgage (apparently they view the best way to recover from a housing bubble is to reflate the bubble). They lowered some rates to zero, while printing money to buy bonds and lower other borrowing costs, like mortgages.
The bonds they purchased are counted on their balance sheet. Years of stimulus pushed the balance sheet to a massive level of $4.5 trillion. The image below shows how the balance sheet has grown not just here, but at other central banks around the world.
We can also see that as the balance sheet has grown, the stock market has grown, too.
This Fed meeting this week was important because it signaled that we are, in fact, in the “beginning of the end” of their stimulative economic policy. They announced they will slowly – very, very slowly – start to shrink the size of their balance sheet.
They also signaled they will likely raise interest rates one more time this year, which appeared to catch some investors off-guard. Below we can see how the odds of a rate hike have risen sharply in recent days:
They also signaled they will likely raise interest rates one more time this year, which appeared to catch some investors off-guard. Below we can see how the odds of a rate hike have risen sharply in recent days:
It was clear from this meeting that the Fed will continue to pull back on stimulus, but we were surprised by how little impact the news had on the stock market. Other markets saw more of the reaction we’d expect, like bond prices and gold falling and the dollar rising.
Aside from the Fed, there was little other news in the market this week. Economic data was light and the only reports were disappointing ones on housing.
Interestingly, housing prices continue to outpace wages. This goes back to our earlier point of the Fed’s response to a bursting housing bubble was to reflate it.
Aside from the Fed, there was little other news in the market this week. Economic data was light and the only reports were disappointing ones on housing.
Interestingly, housing prices continue to outpace wages. This goes back to our earlier point of the Fed’s response to a bursting housing bubble was to reflate it.
We also saw a reduction in GDP estimates for the third quarter. This analysis comes from the economists at the Atlanta Fed, which have typically been fairly accurate:
Next Week
Economic data picks up next week. We’ll get info on durable goods, personal income and spending, and more housing data. Several regional Fed presidents will also be making speeches, which always have the potential to move the market.
Investment Strategy
No change here. The market remains on the expensive side in the short run and not at a level we find attractive for new money. There may still be a little room to run higher, but we are cautious as we enter a historically volatile part of the year for stocks.
As for our longer term view, our outlook is a little less rosy but still positive. We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished. The overall business climate is still favorable, which we think will still help the market.
Bond prices continued to move lower this week (so yields rose), but we don’t expect to see a much larger move lower in bond prices and think prices will remain around these high levels.
As for the rest of the portfolio, 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. 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 as a flight to safety.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets, though they are looking cheap.
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.
Economic data picks up next week. We’ll get info on durable goods, personal income and spending, and more housing data. Several regional Fed presidents will also be making speeches, which always have the potential to move the market.
Investment Strategy
No change here. The market remains on the expensive side in the short run and not at a level we find attractive for new money. There may still be a little room to run higher, but we are cautious as we enter a historically volatile part of the year for stocks.
As for our longer term view, our outlook is a little less rosy but still positive. We were hoping to see some pro-business reforms being implemented in Washington – lower taxes, regulations, etc. – but the likelihood of any significant reforms has diminished. The overall business climate is still favorable, which we think will still help the market.
Bond prices continued to move lower this week (so yields rose), but we don’t expect to see a much larger move lower in bond prices and think prices will remain around these high levels.
As for the rest of the portfolio, 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. 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 as a flight to safety.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets, though they are looking cheap.
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.
