A sure thing in investing?
September 26, 2016
Investors like a sure thing, so they should mark this on their calendar (okay, in pencil, just in case): On Dec. 14, the Federal Reserve will raise its benchmark rate for the first time this year and only the second time since 2006.
That was the upshot of last week's Fed meeting, where the Federal Open Market Committee voted against a rate hike, as expected, but indicated that the economy was strong enough that there would be an increase before year's end. The news pushed the major indexes up for the week, despite a rocky Friday, and drove the yield on the 10-year Treasury down to 1.615 percent — it's been as high as 1.752 percent this month.
After the Fed's two-day meeting, Chairwoman Janet Yellen said, "We're generally pleased with how the economy is doing," while noting that committee members had "struggled" to reach a consensus regarding a rate increase (the vote was 7-3, the first time in two years that as many as three members voted for a hike). The Fed's official statement said, "The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence." The statement noted that the overall economic outlook was "roughly balanced," citing, on the one hand, the stronger job market and improved consumer spending, while noting, on the other hand, weak business investment and stubbornly low inflation. Yellen emphasized, "Our decision does not reflect a lack of confidence in the economy."
It is, of course, possible that the Fed will act at the meeting on Nov. 1 and 2, but the consensus is that it's unlikely to do so that close to the election. Yellen, at her post-meeting press conference said, "We do not discuss politics at our meetings, and we do not take politics into account in our decisions," but as The New York Times noted, the apolitical party line "is regarded as tactful rather than truthful." Still, while the Fed is now expected to act this year, it pared back the scale and pace of its increases, which encouraged bond buying. Last September, the Fed had said its rate would be at 3.4 percent by the end of 2018; now it's targeting 1.9 percent, and now forecasts two rate hikes in 2017 rather than three.
The BOJ and inflation
The Fed wasn't the only central bank in action – or not – last week. While the European Central Bank recently disappointed investors by standing pat with its stimulus spending, the Bank of Japan (BOJ) said it was going to take steps to "overshoot" its inflation target of 2 percent, while also continuing its stimulus program and maintaining its negative interest rate. However, as more than one pundit noted, the BOJ, which has long battled slow inflation, and even deflation, didn't say what its new target for inflation was or how it was going to get there. The most recent year-over-year reading was -0.5 percent. The bank also revealed the news that its balance sheet is expected to exceed 100 percent of gross domestic product (GDP) in just over a year; the Fed's, in contrast, equals about 20 percent of United States GDP.
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Though the price of oil was up for the week after the International Energy Agency reported lower-than-expected oil inventories for the week before, it plunged on Friday. U.S. crude fell $1.84 to $44.48 a barrel, while Brent crude dropped $1.76 to $45.89. The catalyst was a report that Iran and Saudi Arabia were again clashing over the details of an oil production freeze that some had hoped would happen at the Organization of the Petroleum Exporting Countries (OPEC) informal meeting this coming week in Algiers. Iran and Saudi Arabia are enemies in the proxy war in Syria, and Iran is also reportedly not ready to limit production so soon after sanctions against its oil exports were lifted in January of this year. Other OPEC members have been pushing for a cap on production, such as Venezuela, in the midst of a paralyzing economic crisis, Russia, a non-member but leading oil producer, and Ecuador.
The OECD reconsiders
In other news, the Organization for Economic Cooperation and Development (OECD) lowered its forecast for global growth in both 2016 and 2017 by one-tenth of a percentage point to 2.9 percent and 3.2 percent, respectively, citing trade as a contributing factor to the downward revision. The OECD also said that the Brexit will not trigger a recession in Great Britain, reversing its earlier forecast, but that growth there would slow in 2017.
Housing starts, permits, sales fall
On the housing front, the government said that starts were off 5.8 percent in August from July to an annualized total of 1.14 million. Building permits also declined month over month, falling -0.4 percent to 1.14 million. The National Association of Realtors reported that sales of existing home sales dropped 0.9 percent in August from July to an annualized rate of 5.33 million, partly because of low inventory, down 3.3 percent to 2.04 million, which is 10.1 percent lower than it was in August 2015. The Conference Board's Index of Leading Economic Indicators was off 0.2 percent in August from July. And first time jobless claims fell 8,000 to 252,000 for the week ending Sept. 17; the four-week moving average for the week ending Sept. 10 dipped 2,250 to 258,500.
A look ahead
In the wake of the Fed's decision, investors will have lots of economic data to consider this week, including the latest on new and pending home sales, the S&P CoreLogic Case-Shiller Index for home prices in major metro areas, consumer confidence, orders for durable and capital goods, wholesale inventories and personal consumption expenditures. On Thursday, the government will release its final estimate for second-quarter GDP growth, expected to come in at 1.3 percent – the original reading of 0.8 percent was subsequently revised to 1.1 percent.
This commentary was prepared specifically for local wealth management advisers by Northwestern Mutual Wealth Management Company®.
The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.
All investments carry some level of risk including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. No investment strategy can guarantee a profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. High yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.
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