November 16, 2015
The Markets
Attacks on Paris by the Islamic State were an
appalling exclamation point at the end of a difficult week for stock markets.
World stock markets tumbled as investors braced for a
possible rate hike by the Federal Reserve in December. Many national indices
across the United States, Europe, and Asia experienced downturns of more than 2
percent. The Dow Jones Industrial Average lost 3.7 percent and the Standard
& Poor’s 500 Index gave back 3.6 percent. The exception was Japan’s Nikkei
225, which gained 1.7 percent, largely because its weakening currency
benefitted Japanese exporters.
The chances are pretty good the
Federal Reserve will lift rates during December. A Reuters’ poll of 80 economists asserted there is “a 70 percent
median chance the U.S. central bank would raise its short-term lending rate at
its final meeting of the year...” A survey taken by The Wall Street Journal found 92 percent of academic and business
economists expect Fed liftoff in December.
Even
if the Fed does raise rates, it’s important to remember that market forces
determine interest rate levels. Raising the Fed funds rate is the Fed’s way of
encouraging higher interest rates and tighter monetary policy, but it may not have
the intended affect. Crain’s Chicago Business reported, “The Fed is
moving into uncharted territory. It has never tried to raise the federal funds
rate – that is, make money harder to get – when the banking system was flush
with $2.5 trillion of excess reserves, as it is now.”
In the U.S., investors digested weaker-than-expected
retail sales data. U.S. retail sales remained in positive territory in October
(up 0.1 percent); however, economists were anticipating an increase of 0.3
percent. Regardless of the discrepancy, there are signs consumer spending will
remain steady through the last quarter, according to Reuters. As a result, retail sales data are unlikely to affect
decisions being made by the Federal Reserve.
It’s likely markets will continue to rumble and roil next
week as the world processes the horrific Islamic State strikes in Paris, in
Lebanon, and against Russia.
Data as of 11/13/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard &
Poor's 500 (Domestic Stocks)
|
-3.6%
|
-1.7%
|
-0.8%
|
13.8%
|
11.0%
|
5.1%
|
Dow Jones Global
ex-U.S.
|
-2.2
|
-6.3
|
-8.3
|
2.4
|
-0.4
|
1.3
|
10-year Treasury
Note (Yield Only)
|
2.3
|
NA
|
2.4
|
1.6
|
2.8
|
4.6
|
Gold (per ounce)
|
-0.7
|
-9.8
|
-6.9
|
-14.4
|
-4.6
|
8.8
|
Bloomberg Commodity Index
|
-3.3
|
-21.0
|
-28.9
|
-16.4
|
-11.2
|
-6.8
|
DJ Equity All REIT Total Return Index
|
-2.1
|
-2.4
|
1.0
|
10.4
|
11.4
|
7.1
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg
Commodity Index returns exclude reinvested dividends (gold does not pay a
dividend) and the three-, five-, and 10-year returns are annualized; the DJ
Equity All REIT Total Return Index does include reinvested dividends and the
three-, five-, and 10-year returns are annualized; and the 10-year Treasury
Note is simply the yield at the close of the day on each of the historical time
periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com,
London Bullion Market Association.
Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not
applicable.
what will hAPPEN after the federal reserve begins to raise rates? If the Fed’s efforts to
raise interest rates are successful, what
will happen next? It all depends on whom you ask:
Dr. David P. Kelly, CFA, Managing Director Chief Global Strategist,
JPMorgan: “Looking back at
prior Fed rate hikes suggests that at first, investors have a tough time
stomaching the idea of higher yields. However, as it becomes increasingly
apparent that the Fed is hiking rates for all of the right reasons, markets
re-price in line with their underlying fundamentals. For that reason, it is
important for investors to prepare for a likely uptick in volatility around Fed
liftoff.”
Robert
C. Doll, CFA, Chief Equity Strategist, Nuveen: “First, higher rates would likely trigger
higher bond yields, which would be a negative for Treasuries. Additionally, an
increase would likely put upward pressure on the U.S. dollar. A strong dollar
is usually a negative for oil prices… Finally, we think the combination of
higher rates and a stronger dollar could hurt U.S. companies that do most of
their business overseas.”
The
Financial Times: “Almost every asset class on the planet exhibits some evidence of
frothiness these days, but some seem more vulnerable to higher interest rates.
Although stocks look expensive, higher interest rates indicates that economic
growth is firm, and that is good for listed companies. Gold typically loses its
shine when interest rates climb, as the metal doesn’t pay any interest like a
bank account will, but has already been beaten up heavily recently. The bond
market looks more exposed.”
The Fed is expected to raise
rates slowly and cautiously. We won’t know when rates will increase or by how
much until the next Federal Open
Market Committee meeting. That meeting takes place on December 15, 2015.
Weekly Focus –
Think About It
“Terrorism [takes] us back to ages we thought were
long gone if we allow it a free hand to corrupt democratic societies and
destroy the basic rules of international life.”
--Jacques Chirac, former
French Prime Minister
Best
regards,
Leif M. Hagen
Leif M. Hagen, CLU, ChFC
LP Financial Advisor
Securities
offered through LPL Financial Inc.,
Member
FINRA/SIPC.
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock
market in general. You cannot invest directly in this index.
* The Standard & Poor’s 500
(S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees,
expenses, or sales charges.
Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.
Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.
The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the commodity
futures market. The Index is composed of futures contracts on 19 physical
commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
http://www.wsj.com/articles/global-stocks-fall-after-commodity-price-rout-1447406436 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/11-16-15_WSJ-US_Stocks_Fall-Log_Big_Weekly_Decline-Footnote_1.pdf)
http://online.barrons.com/mdc/public/page/9_3063-economicCalendar.html? (Click on “U.S.
& Intl Recaps,” "Reading the tea leaves, " and scroll down to view
the table) (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/11-16-15_Barrons-Reading_the_Tea_Leaves-Footnote_2.pdf)
https://www.jpmorganfunds.com/blobcontent/714/798/1159355093158_BRO-MI-QP-1.pdf (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/11-16-15_JPMorgan-Quarterly_Perspectives-Footnote_8.pdf)
http://ig.ft.com/sites/when-rates-rise/ (Scroll down to the FAQ box and click on “What investments are most
sensitive to interest rate rises?”) (or
go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/11-16-15_FinancialTimes-When_Interest_Rates_Rise-Footnote_10.pdf)
