Thank the Fed for the recent Market Volatility
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 9/28/15. Rates and Economic Calendar Data from Bloomberg as of 9/30/15.
While Janet Yellen conceded that the projections for future U.S. economic growth and the current state of the U.S. labor market provided for a valid argument that an initial increase to the Federal Funds Target Rate was now warranted, however the Federal Reserve (“Fed”) decided, almost unanimously, that no such action would be taken after the most recent meeting in September.
This somewhat surprising decision has heightened investor uncertainty and led to more market volatility in the days followed. Despite indications from Yellen and the Fed that a September lift off was likely following their meeting in June, based upon their own economic data parameters, the Fed blinked again, in our view, bowing this time to concerns over global economic woes and a weakened inflation outlook in addition to a large contingent of vocal market professionals insisting that it was still too soon for an interest rate hike.
After reviewing the revised projections from the FOMC voting members stemming from the September meeting, we believe that the Fed may be more concerned with future global economic growth potential and its impact on the impish U.S. economic recovery than they are letting on. This is significant and something to watch going forward. For example, after the March meeting, we calculated that the weighted Fed Funds Target Rate of the FOMC voting members for 2016 was roughly 2.0% (2.02% to be exact). Following the September meeting, this weighted Target Rate for 2016 has decreased to roughly 1.5% (1.48% to be exact), with a median projection of 1.4%.
Given that there is as strong of a probability as ever that the Fed will start to raise interest rates in the not too distant future, investors would be wise in our view to consider asset classes or sectors that have historically performed well on a relative basis during previous gradual, drawn-out periods of tightening on the part of the Federal Reserve. To learn about the strategies we are using to help our clients weather periods of increased market volatility while also positioning them for a rising rate environment, please speak with your Hennion and Walsh Financial Advisor a member of the Hennion and 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 and 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.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
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.