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Market Overview

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.

Happening Now                   

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.

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.

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.

Definitions

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.