Global Concerns Weigh, FED Keeps Course

Highlights of this Week’s Update:

1. U.S. stock indices end last week higher while interest rates dip.
2. Global events weigh on markets early this week.
3. U.S. Treasury issues rules prohibiting U.S. corporations from taking advantage of more favorable foreign tax policies.
4. The FED keeps the policy of “steady she goes” with no obvious changes in policy.
5. Our outlook remains unchanged, with continued underweighting in stocks/equities for all risk levels.

 The Markets:

Last Friday the major U.S. stock indices managed to close out with gains for the week.  Even with the recent decline over the past two days, the Dow Jones Industrial Average and S&P 500 are only around 1% off their 2014 closing highs hit last Thursday. (Google Finance)  The yield for the 10 year U.S. Treasury fell last week (prices rose) to 2.59%, down from the previous week’s close of 2.62%. (U.S. Treasury)   The fixed rate for a 30 year mortgage is around 4.17%, while a 15 year fixed mortgage is now approximately 3.26% today. (Bankrate.com)

Global markets have fluctuated over the past few days on mixed economic data.  Concerns over Chinese economic growth eased somewhat with release of their manufacturing purchasing managers’ index which moved up slightly in September.  New concerns from Europe surfaced with Germany’s manufacturing sector showing the slowest growth rate in 15 months, while the Eurozone overall hit a 14 month low.  (Morningstar)  The U.S. Treasury announced new rules this week for corporate tax inversions, keeping U.S. companies from taking advantage of more favorable foreign tax policies in the future.

All these along with the start of U.S. airstrikes in Syria have weighed on the markets since Friday.

 The Fed:

The Federal Reserve concluded its two-day meeting last Wednesday with few substantive changes. The dovish stance from the Fed helped push the Dow Jones Industrial Average and the S&P 500 Index higher late in the week (St. Louis Federal Reserve data). Yet, the bond market is still trying to sniff out the day when the Fed begins a long-awaited series of rate hikes.

There were two things investors were looking for that would have signaled a more aggressive Fed:

First, there were expectations the Fed would remove its language that stated there would be a “considerable time” between the end of its bond-buying program (set to end in October) and the first increase in the fed funds rate. It didn’t (Federal Reserve – Fed statement).  Fed Chief Janet Yellen did not define what “considerable time” means, but she insisted in her press conference that it depends on how the economic data play out. If it’s stronger than expected, than we could see sooner and more aggressive rate hikes. If it’s weaker, than rate hikes could be delayed (Federal Reserve – transcript of press conference).

Second, would the Fed remove the phrase, “…there remains significant underutilization of labor resources?” Again, it didn’t.  As Yellen highlighted in her press conference, “There are still too many people who want jobs but cannotfind them, too many who are working part time but would prefer full-time work, and too manywho are not searching for a job but would be if the labor market were stronger.”

Interest Rates:

Bond yields have recently turned higher. Longer-term yields remain below the highs seen at the end of last year but are off the lows of the summer. The yield on the 10 Year U.S. Treasury is still lower at the current 2.59% level than it was at the start of 2014, when it was 3.04%.  (U.S. Treasury)  The two-year yield, which is considered a proxy for what the Fed may do with short-term rates, is at its highest level since May 2011 (St. Louis Federal Reserve).

Our Outlook:

We would expect interest rates to ease off again between now and year-end.  This should be beneficial to bond/fixed income asset prices.  The equity/stock markets also appear, in our opinion, overvalued in general.  We continue our underweight positions in stocks/equities for all risk levels, and an overweight in fixed income/bond assets.  We have shortened the overall maturities in our fixed income holdings in an effort to reduce risk and volatility in general.   We also continue to hold some “alternative” asset positions, which include exposure to commodities, precious metals, and real estate for diversification of assets in the current environment.

It was good seeing many of you last week at our annual client appreciation event, and we hope you enjoyed the evening if you were able to attend.  It’s hard to believe we are already about to close out the third quarter of 2014 and the official start to fall is here!

God Bless,

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

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