Federal Reserve Takes Dovish Stance Amid Uncertainties
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 06/17/16. Rates and Economic Calendar Data from Bloomberg as of 06/20/16.
U.S. Stocks fell 1.1% last week during a series of risk off trading sessions that spurred a flight to quality and led the yield on the 10 year U.S. Treasury down to 1.62%. International developed markets dropped 2.8% and emerging markets lost 2.1%. U.S. Stocks are now up 2.4% since the start of the year which places them ahead of international developed markets (down 4.9% YTD) but still behind emerging market equities (up 2.5% YTD).
Taking a more dovish tone than most were expecting, the Federal Open Market Committee (FOMC) left rates unchanged last week and lowered their forecast for the Fed Funds Target rate to 0.75% for the end of 2016, suggesting only one additional hike this year. While only explicitly sighting a slowdown in the improvement of the labor market, soft business investment and low inflation, it is likely that that uncertainty stemming from the U.K. referendum also had a role in their decision. Central banks in Japan, England and Switzerland also left rates unchanged last week, renewing concerns of a global economic slowdown and helping to fuel the risk off sentiment in capital markets.
In addition to the Fed statement and press conference last week, economic projections were also released and unlike past meetings, were the primary focus of discussion. Members of the media quickly took note of the inconsistency in Fed forecasts and the degree to which expectations for GDP, Employment, Inflation, and interest rates have changed relative to past releases. Consider the data below which compares the average central tendency of forecasts from the most recent meeting to those in the June 2015 release.
Full FOMC projections, statements, and press conference transcripts can be found on the Federal Reserve Website.
The changes in forecasts, we believe, highlight two underlying ideas central to successful investing. The first is that no one can project for certain how the economy will behave over the course of the next twelve months (let alone how the stock market will perform); because of this fact it is important to ensure that you have the diversification in place to withstand unexpected changes. The second is that it is OK to change your forecasts when new information is released. One of the primary behavioral biases investors fall victim to is being too loyal to their original estimates and not properly accounting for new information (Forbes 2011). We suggest periodic reviews on a quarterly basis to ensure that your investments decision of buying, selling or holding reflects the most recent information.
Recognizing the time required to account for changes in the market and economy, we strongly suggest individuals work with a professional portfolio manager when adjusting their portfolio. To learn more about how we at Hennion & Walsh work with clients during our quarterly reviews, or to simply have a free portfolio review completed, do not hesitate to speak with your Hennion & Walsh Financial Advisor, or a member of the Hennion & Walsh Asset Management Team.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
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Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.