Are the Dog Days Over?


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by Jason Norris, CFA
Executive Vice President of Research

Stocks finished the week up over one percent as the Fed held steady on rates but provided positive commentary on the U.S. economy. With the lack of Fed action, the 10-year Treasury yield fell 0.06 percent to close the week at 1.63 percent.

After a strong week in the equity market, returns for September may end with a plus sign which would buck historic trends as September has historically been the worst month of the year for returns (see chart below). Fortunately, looking at the calendar indicates the fourth quarter is a good time to be invested.


Will They Stay or Will They Go?

Earlier this week, the Federal Reserve held its benchmark rate steady at 0.25 to 0.50 percent. While Fed Chair Yellen stated that the economy has improved, she was not ready to increase rates. Despite her position, there was a shift in the board and some previous “doves” voted to raise rates. With a healthy employment market and inflation trending higher, it is going to be difficult for the Fed to maintain the current level of rates. With two meetings remaining in 2016, we believe the Fed will increase rates once before year-end. However, this will not result in a major shift upward in longer-term interest rates due to historically low interest rates outside the U.S. The chart below shows the amount of global sovereign debt yielding below one percent, which will put a ceiling on our longer rates moving meaningfully higher in the near future.


One place where rates have been low for a very long time is Japan. In fact, in recent months, the yield on the 10-year Japanese Government Bond (JGB) was under zero percent. The Bank of Japan has now stated that they are going to target the 10-year JGB at zero percent. This is an admission that negative yields are bad for the financial system, specifically for banking, insurance and pension funds. Time will tell if the Bank of Japan can manage this target and how it will affect the financial system. Either way, we remain cautious on Japanese equities and maintain an underweight position in client portfolios.

Our Takeaways for the Week

  • We are entering what has historically been the strongest quarter for equity returns
  • Central banks are more than willing to err on the dovish side of interest rate policy


Reading the Fed’s Tea Leaves


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by Deidra Krys-Rusoff

Senior Vice President


Despite volatility, the stock market appears to heading for a slight gain of around 0.5 percent for the week. Bond yields trended higher, with the benchmark 10-year trading at 1.66 percent versus last Friday’s level of 1.57 percent. The core Consumer Price Index topped expectations in August, rising 0.2 percent versus expectations of 0.1 percent. Retail sales unexpectedly declined 0.3 percent and industrial production fell 0.4 percent.

Reading the Fed’s Tea Leaves

Last Friday, the markets woke up from a relatively boring summer to volatility.

Boston Federal Reserve President Eric Rosengren gave a hawkish perspective by noting that waiting too long to raise interest rates may lead to an overheating economy. Both stock and bond market investors read into that statement that a September rate hike may be back on the table and subsequently sold off. Monday, Federal Reserve Board Governor Lael Brainard laid out her recommendation for patience in removing the accommodating federal policy, which seemed to calm market fears. What message can we take away from these two very different speeches?

First, let’s look at where we are today. The Federal Open Market Committee (FOMC) currently has the federal funds rate pegged in a range of 0.25 to 0.50 percent, which is certainly low, but not as low as the negative interest rate policy we have seen in some parts of the world. The federal funds rate has been below 0.50 percent since December of 2008. This is an extremely long timeframe for very accommodating interest rate policy, by historical standards. While the U.S. economy has been on a course of moderate improvement, the global economic downturn has impacted the FOMC’s willingness to raise rates.

Why do we see conflicting messages from Fed members? The FOMC comprises 12 members: seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York and four of the remaining 11 Federal Reserve Bank presidents. Complete consensus between 12 individuals is unlikely and speeches tend to showcase each viewpoint.

Additionally, the Federal Reserve seems to float “trial balloons,” in the form of regional Fed speeches, to assess the type of market response that could occur if the Fed were to change rates. The last few such hawkish remarks have resulted in both bond and stock market selloffs. These remarks may be warning investors that the FOMC is considering raising rates. Fed Governor Brainard’s dovish comments balance out the hawkish remarks and seem to suggest that the pace of any future rate hikes would be slow and steady. The FOMC also continues to stress “data dependence,” suggesting that any change in economic conditions will be taken into consideration.

With the Fed sending mixed messages, what will next week bring? Markets will anxiously await the FOMC’s committee policy announcement on September 21. Fed futures imply that the chance of a rate hike occurring next week is low, around 20 percent. Despite Rosengren’s comments, we expect that the FOMC will hold at the 0.25 to 0.50 percent target rate. Near-term expectations for inflation should remain low and unchanged.

Also, we expect no change in the Fed’s expectation for labor markets and little change to their 2-percent expectation for gross domestic product growth. A more moderate stance may set the stage for a potential rate hike by year-end. Fed futures imply that the chances of a hike in November rise slightly, to 28 percent, with the chances of a hike in December rising to 53 percent.

Our Takeaways for the Week:

  • FOMC will announce policy statement on September 21
  • We expect the statement message to be largely unchanged, despite Fed chatter this week


Seasons of Change


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by Shawn Narancich, CFA
Executive Vice President of Research

Too Quiet for Comfort

After an unusually long spell of low volatility, stocks and bonds sold off in tandem to end a week that was previously on the quiet side following the Labor Day holiday. Coming into Friday, stocks had essentially earned out the high single-digit returns we foresaw for 2016. Low levels of economic growth globally should renew profit growth in future quarters, but neither stocks nor bonds are cheap at this point. Accordingly, they are more susceptible to periodic setbacks despite accommodative monetary policy.

Easy Money

As for the Fed, it remains one of the few central banks globally that is trying to raise rates amid a flood of central bank bond buying in Europe and Japan. Such monetary largesse overseas is increasingly making its way into our fixed income markets, as foreign investors starved for yield seek out better deals in U.S. bonds and dividend-paying stocks. If the Fed moves too fast, it risks renewed dollar strength that could threaten an already slow domestic expansion, and at a time when our central bank is still struggling to meet its 2 percent inflation goal.

Overseas, the European Central Bank met this week and decided to keep its commercial bank deposit rate at -0.4 percent and 80 billion euro/month of bond buying in place. Following surprisingly strong gains in stocks post-Brexit, investors seem to have been disappointed that the ECB didn’t announce the extension of its QE program past next spring or liberalize its choice of assets to buy. Draghi & Co. are clearly seeing the effects of unconventional monetary policy, as not only are German Bunds trading with a negative yield, but now, so are 20 percent of European corporates! Strange times indeed. . .

Black Gold

Stateside, a bullish oil inventory report put a strong bid into oil prices as traders cheered a 14 million barrel draw over the past week. We knew this weekly inventory report was going to be skewed lower by Hurricane Hermine that blew through the eastern Gulf of Mexico, but estimates into numbers hadn’t properly accounted for shut-in production and import disruptions. Once the inside scoop got discounted, oil reversed most its gains from Thursday. We would observe that while the volatility in oil this year has been dizzying, the industry austerity engendered by sub-$50 oil is slowly but surely being reflected in higher prices – prices that are also responding to persistent demand growth. Our overweight to energy stocks and the oil service / independent producer segments within the sector position our client portfolios to benefit from rising prices.

Our Takeaways for the Week

  • Volatility returned to the capital markets this week
  • For oil prices, it’s a three-steps forward, two-steps back affair


Show Me a Sign


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by Jason Norris, CFA
Executive Vice President of Research

With today’s jobs number showing a monthly gain of 151,000, it didn’t tip the scales much regarding a Federal Reserve rate hike this year. This number was below expectations of 180,000; however, it was still viewed as solid growth. Wage growth remained a steady 2.4 percent, slightly below last month. The August jobs report number regularly gets revised higher. The last six August jobs reports have been revised higher by a median of 65,000. Therefore, this number could be closer to 200,000 when all is said and done. Either way, we don’t think this changes the view of the Fed, and the market expectations didn’t change much as well. According to Bloomberg, there was a 34 percent change of a hike in September which has shifted down a bit to 30 percent. December still remains at a probability of 60 percent.

Calm the Fire

Alan Greenspan coined the term, “Goldilocks economy” in the late 1990s, which indicated that economic expansion was not too hot, nor too cold. While we would argue that the U.S. economic growth may only be lukewarm, it isn’t cold enough for concerns of a recession. This predicament has left the Fed in a bind, where it seems they will be very slow to move rates higher. As bond and stock markets digest this, volatility has been greatly reduced. For the last eight weeks, the yield on the 10-year Treasury has been trading in a tight range between 1.5 percent and 1.6 percent. Also, equity market volatility has been muted the last several months. In the first 31 trading days of 2016, stocks moved up or down over 1 percent on 20 of those days. Since then, we’ve had 139 trading days and only seen a 1-percent move 19 times, with nothing in the last two months. Historically, stocks will move over a percent 25 percent of the time, as seen in the chart below.



Historically, September is the worst month for stocks, so there is the potential for increased volatility, thus we don’t want to get too complacent. However, if earnings continue to improve in the second half of the year and interest rates stay low, we believe we will see a steady grind higher in stock prices.

Our Takeaways for the Week

  • The U.S. job market is in Goldilocks mode
  • A steady U.S. economy and low interest will lead to higher equity prices