Yellen’s Remarks Spark a Hawkish Tone
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 08/26/16. REIT, Rates and Economic Calendar Data from Bloomberg as of 08/29/16.
Stocks broke their winning streak last week with the S&P 500 Index losing 0.7%. The light sell-off that occurred resulted in growth stocks1 losing 0.7% and value stocks2 losing 0.6%. Small Cap U.S. stocks3 actually posted marginal gains of 0.1% last week and are now up 10% for the year, essentially even with their domestic Mid-cap4 counterparts which have appreciated 9.9% for the year, while outpacing U.S. Large cap stocks5 which are up 7.7% for 2016. On the international front, developed country stocks6 experienced a 0.2% move higher last week and are up 1.9% for the year whereas emerging markets7 experienced a 0.95% decline but finished the week still up 15.8% year-to-date.
As we discussed last week, market participants were keen to review Janet Yellen’s Jackson Hole speech which she delivered at 10:00am last Friday. Markets churned during and after her presentation as her main talking points made their way out to the public. Initially, stocks gained as much as 0.68% at approximately 10:17am only to fall 1.23% and reach a daily low of -0.55% by 2:31pm. The S&P 500 Index recovered from there and finished with a daily loss of just 0.16%. This represents the 34th straight day without a gain or loss of greater than 1%.
Janet Yellen’s remarks centered on the idea that the general economic conditions for a rate hike are improving while stressing the continuance of the Fed’s data dependence. We certainly didn’t find her remarks all that different from her previous comments, considering that data has improved and there has not been a global macro-economic event to keep the Fed’s stance cautious. In addition to Chair Yellen’s comments, a number of Fed Presidents gave interviews to Bloomberg’s Michael McKee, including Kansas City Bank President Esther George who said, “When I look at where we are with the job market, when I look at inflation and our forecast for that, I think it’s time to move.” Dallas Bank President, Robert Kaplan and St. Louis Bank President, James Bullard echoed a similar sentiment saying that, in effect, the case is strengthening and the time is near for an interest rate hike. To help ensure that their statements were not taken as overly hawkish, each Bank President stressed that additional rate hikes should take place on a gradual path and the terminal rate would remain lower than historical standards.
Given the statements made through various interviews and Chair Yellen’s comments, the probability for a rate hike at the September meeting is now 42% according to Bloomberg. While we don’t believe that a rate hike of 25 Basis Points (i.e. 0.25%) will dampen economic growth in the U.S. or weigh on corporate earnings, we are sensitive to the fact that the initial reaction by the stock market may catch some by surprise. Volatility remains persistently low, the yield on the 10 Year U.S. Treasury is 0.56% lower than this time last year, and stock market valuations are marginally higher than their historical averages in nearly every sector. In this type of environment, we believe that it is essential that investors have the diversification necessary to withstand a downturn in stock prices. If you would like to have a portfolio review completed to ensure that you are positioned appropriately, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
1 Growth Stocks are represented by the Russell 1000 Growth Index. 2 Value stocks are represented by the Russell 1000 Value Index. 3 Small Cap stocks are represented by the Russell 2000 Index. 4 Mid Cap stocks are represented by the Russell Mid Cap Index. 5 Large Cap stocks are represented by the S&P 500 Index. 6 Developed country stocks are represented by the MSCI EAFE Index. 7 Emerging Markets are represented by the MSCI EM Index.
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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.
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