Weekly Update

The Markets:

Markets crave certainty

Geopolitical anxieties have cropped up on occasions, generating unwanted jitters. They typically don’t hang over the markets for very long, but nonetheless, heightened uncertainty can create some volatility. Case in point, recent events in Syria and its close ally Russia.

The probable use of chemical weapons by Syria elicited a strong verbal response from the U.S., and a military strike seemed all but inevitable a couple of weeks ago.  Last week, however, an apparent off-the-cuff comment by Secretary of State John Kerry that Syria could avoid a U.S. attack by giving up its weapons of mass destruction (Reuters, various sources) was taken to heart by Moscow, and tensions in the volatile Middle East waned.

Stocks rallied last week, the price of oil and gold eased, and by the weekend, the U.S. and Russia agreed to a framework for Syria to destroy its chemical weapons by the first half of next year (Wall Street Journal). Of course, complications may arise in the coming days or weeks, but for now, increased certainty has calmed the equity markets.  We still see the signs of the stock markets “topping out” at any time, and have maintained a more defensive allocation of overall assets within our portfolios for all risk levels.  Our equity/stock exposure has been underweighted for much of this year, and we still look for stock prices in general to take a drop at some point, interest rates to back off once again, and commodity prices to rise.  We are currently diversified among various asset categories, based on risk, and continue to watch for any new developments on a regular basis.

All Eyes on the FED:

Stocks have also found some support from a growing belief that any Fed reduction in its $85 billion in monthly bond buys, designed to put downward pressure on longer-term interest rates and stimulate economic activity, will be much more gradual over an extended period of time. The next Fed meeting concludes on Wednesday of this week and a tapering could be announced at that time.  We will probably see some increased volatility in the financial markets overall until the Fed announcement is made and digested over the next several days.

Since launching its latest round of bond purchases last September, the unemployment rate has fallen from 8.1% to 7.3% (BLS data), giving the Fed some ammunition needed to start dialing back.  As we’ve mentioned many times in the past, the unemployment rate does not fully capture the true state of the labor market, but it is currently the Fed’s chosen yardstick nonetheless. Fed Chief Ben Bernanke said in June that he believed bond buys would cease when the jobless rate “is in the vicinity of 7% (June Bernanke press conference),” and we are closing in on that target.

Another reason the Fed may want to get out of the “bond-buying business” – its balance sheet has soared over the last five years, rising from $875 billion in June 2008 to $3.6 trillion as of last week (see chart below). It will eventually need to detail plans to “normalize” its balance sheet.

Fed Balance Sheet

With Syria moving to the backburner (for now), market attention will shift to this week’s Fed meeting and Congress moving forward.

Another Budget Fight Looming Ahead:

The government will no longer have the authority to spend on non-essential items after September 30th  (Reuters) and will have to pass a continuing resolution or it will shut down, much like what happened in late 1995.  The U.S. Treasury has already said the government’s ability to borrow will run out in the middle of October. Recall the summer of 2011 when Congress was involved in an intense debate over raising the debt ceiling.  The Standard & Poor’s 500 stock index fell approximately 16.5% in just under one month’s time, from July 22, 2011 to August 19, 2011. (Google Finance)

Republicans are hoping to use the debt ceiling to extract budget concessions, while Treasury Secretary Jack Lew has forcefully said, “We will not negotiate over the debt limit (CNBC interview).” Much like the fiscal cliff negotiations in late 2012, politicians may craft a narrow agreement as deadlines approach, but unwanted uncertainty has the potential to create short-term volatility.

We are preparing for the end of the third quarter that is just two weeks away, as well our upcoming client event celebrating our 30th anniversary year on October 3rd.  We hope most of you will be able to attend this year!   We appreciate the privilege to be of service to each and every one of you, and look forward to working with you in the years to come.

God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.

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