Investment Commentary –December 14th, 2016
Market Indices as of Market Close December 14th, 2016
Dow 19,792 (13.59% YTD)
S&P 2,253 (10.16% YTD)
NASDAQ 5,436 (8.57% YTD)
Gold $1,142 (52 Week Low $1,055 High $1,387)
OIL $50.89 (52 Week Low $34.55 High $54.51)
US 10Y Treasury 2.57 (52 Week Low 1.32 High 2.58)
Stocks sells off in volatile afternoon trade as Fed points to 3 rate hikes in 2017
U.S. stocks fell in volatile trade on Wednesday, with major indexes falling to their lows of the session after the Federal Reserve signaled a faster pace of interest rate hikes than had been previously forecast.
The Dow Jones Industrial Average DJIA, -0.60% fell 147 points to 19,764, a move of 0.7%, while the S&P 500 index SPX, -0.81% dipped 21 points, or 0.9%, to trade at 2,250. The Nasdaq Composite Index COMP, -0.50% lost 32 points, or 0.6%, to 5,432.
The Fed also raised its key short-term rate, as had been universally expected. The rate moved to a range of 0.5%-0.75% from 0.25% to 0.5%. The Fed decision marks the central bank’s first increase in rates since December 2015, which itself was the first in about a decade.
The U.S. central bank forecast three rate increases in 2017, compared with the two that had been anticipated at its previous meeting in September. While the revised outlook could be taken as a sign—the Fed has said it would only raise rates when it deems the economy strong enough to withstand such a move—it added an element of uncertainty to the market.
”Three rate increases next year is something of a surprise, and it may take some time for investors to digest that,” said Mike Loewengart, vice president of Investment Strategy at E*TRADE.
“It is indicative of a stronger economy, but with increased borrowing costs it won’t be as easy for companies that are reliant on debt. This is the next step in our transitioning back to an environment where fundamentals matter more than policy, and some investors may be pausing because of that.”
All three major indexes briefly traded higher after the announcement, but they turned lower as Yellen began a news conference.
The DOW and the S&P track all the stocks but who is tracking the bonds?
WHAT IT IS:
The Barclays Capital U.S. Aggregate Bond Index is the most common index used to track the performance of investment grade bonds in the U.S.
Bonds play a key roll in proper asset allocation for long term investors.
HOW IT WORKS (EXAMPLE):
The Barclays Capital U.S. Aggregate Bond Index is weighted according to market capitalization, which means the securities represented in the index are weighted according to the market size of the bond category. Treasury securities, mortgage-backed securities (MBS) foreign bonds, government agency bonds and corporate bonds are some of the categories included in the index. The bonds represented are medium term with an average maturity of about 4.57 years. In all, the index represents about 8,200 fixed-income securities with a total value of approximately $15 trillion (about 43% of the total U.S. bond market).
To be included in the index, bonds must be rated investment grade (at least Baa3/BBB) by Moody’s and S&P. However, almost 80% of bonds represented on the index have a AAA rating.
WHY IT MATTERS:
The Barclays Capital U.S. Aggregate Bond Index is to fixed income investors what the Dow Jones Industrial Average (DJIA) or S&P 500 is for stock traders. It is the most commonly used benchmark for determining the relative performance of bond or fixed income portfolios. It is also a major indicator for the overall health of the fixed income investing market.
There are many index funds and ETFs that track the performance of the index. This provides more risk adverse investors with the opportunity to invest in funds that provide returns closely related to the overall performance of the U.S. bond market.
THIS DAY IN FINANCIAL HISTORY: December 14th, 1995
Boeing Back to Work
After over two months of striking Boeing workers agree to a new contract and get back to work.
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.