Investment Commentary – December 9th, 2015
Market Indices as of Market Close December 9th, 2015
Global Dow 2333
A Week of Sharp Swings
Last week, stocks and bonds in Europe and the United States came under pressure, although U.S. markets were able to finish with a slight gain thanks to a massive rally on Friday. The tech-heavy Nasdaq Composite Index added 0.29% to close the week at 5,142, while the Dow Jones Industrial Average advanced 0.27% to 17,847 and the S&P 500 Index inched up 0.05% to 2,091. Meanwhile, the yield on the 10-year Treasury rose from 2.22% to 2.27%, as its price fell.
Early in the week, investors were disappointed by a hawkish tone from the Federal Reserve (Fed) and, even more so, modest action by the European Central Bank (ECB). The market’s response reinforced two very important lessons for the coming year: Going forward, central banks will be less effective in pushing asset prices higher, and financial conditions outside the U.S. will continue to affect domestic markets.
Fed set for very gradual rate path after expected Dec 16 hike: poll
The U.S. Federal Reserve will move very gradually after it delivers what is widely expected to be its first interest rate hike in nearly a decade next week, according to a Reuters poll that points to a tame inflation outlook for next year.
Now that Fed officials have made clear they are comfortable the employment part of their dual mandate is met, the pace of future rate increases will depend on confirmation that inflation, which is set to rise, actually is rising.
The probability the Fed raises rates from near zero on Dec. 16 rose to 90 percent from 70 percent in the latest Reuters poll of over 90 economists, taken Dec. 4-9. What has not risen at all are expectations for inflation next year.
“To be sure, moving now appears more about getting the first hike out of the way and changing the conversation away from liftoff to the shallow path of hikes expected thereafter than it is about the current state of the economy demanding tighter policy,” Ellen Zentner, economist at Morgan Stanley, wrote in a note.
Thought of the week
The European Central Bank (ECB) eased further last week, extending the timeframe of quantitative easing and pushing deposit rates even lower. Despite the aggressive easing, markets in Europe and the U.S. sold off at first and then calmed down as investors digested what was ultimately some very positive news. While the ECB has committed to easing policy through March 2017, the Federal Reserve is on the verge of tightening here at home.
The November employment report provided further evidence of U.S. labor market improvement, putting the Fed on track to tighten policy at its December meeting. This rate hike has been well telegraphed and is expected by the market, with market-based odds of a hike approaching 90%. As the Fed raises rates, the divergences in global monetary policy will grow even starker. Despite the market’s initial reaction, this clear divergence in monetary policy highlights the need for investors to have a plan for addressing global monetary policy divergence; U.S. investors may want to look for investment opportunities overseas where asset prices might benefit from the easy money policies.
THIS DAY IN FINANCIAL HISTORY
1941: As the U.S. declares war on Japan, the S&P 500 nosedives, losing 3.23% and bringing its loss since Pearl Harbor to 7.5%.
The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.