Investment Commentary – November 18th, 2015
Market Indices as of Market Close November 18th, 2015
Dow 17,737 (-0.48% YTD)
S&P 2,084 (1.20% YTD)
NASDAQ 5,075 (7.16% YTD)
Global Dow 2,400 (52 week low 2,203/high 2,644)
10-year Treasury 2.27 % (52 week low 1.64/high 2.50)
Gold 1,069 (52 week low $1,062/high $1,310)
Oil 40.67 (52 week low $39.22/high $77.69)

Wall St. rallies after Fed minutes solidify December rate hike bets

U.S. stocks closed higher on Wednesday and investors appeared positively inclined toward higher rates after minutes from the Federal Reserve October meeting showed a solid core of officials rallied behind a possible December rate hike.

Central bankers at the October policy meeting also debated evidence the U.S. economy’s long-term potential may have permanently shifted lower.

The three major indexes added to earlier gains after the 2:00 PM ET Fed release and buying accelerated ahead of the close.

“I think the market is ready and comfortable for an increasing Fed funds rate,” said Alan Rechtschaffen, portfolio manager at UBS Wealth Management Americas in New York. “We just have to turn this aircraft carrier around, get out of this zombie-like economy which is being fed on an elixir of low interest rates and get to a process of normalization.”

The Dow Jones industrial average .DJI rose 247.66 points, or 1.42 percent, to 17,737.16, the S&P 500 .SPX gained 33.14 points, or 1.62 percent, to 2,083.58 and the Nasdaq Composite .IXIC added 89.19 points, or 1.79 percent, to 5,075.20.

Investors widely expect the central bank to raise rates in December, but remain uncertain about the magnitude of the increase and the pace of further hikes.

While stocks often sell off on the prospect of a rate hike, which would raise borrowing costs, many investors are now focusing on a hike as a positive reading for the economy.

Fed officials again flag December; see smooth rates liftoff

Federal Reserve officials on Wednesday continued to flag December as a likely time for interest rates to rise after seven years near zero, with two expressing confidence they will be able to pull off a rate hike smoothly despite fears of an abrupt market reaction.

Investors reacted by increasing the odds for a rate increase next month to 72 percent, from 64 percent on Tuesday, based on interest rate futures prices.

Cleveland Fed President Loretta Mester repeated her position that the U.S. economy is now strong enough to absorb a modest policy tightening. Atlanta Fed President Dennis Lockhart, sitting alongside her on a panel in New York, said global financial markets have settled since the August turmoil that caused the U.S. central bank to delay raising rates.

Thought of the week…

The 3Q15 earnings season has been a tough one for the S&P 500. At the index level, earnings per share fell by 15.2% from a year prior, but rose by 1.8% when the energy sector is excluded. However, despite the weakness observed this year; estimates for 2016 have stayed relatively constant and currently imply a 19.3% increase year over year; that said, even if earnings surprise to the upside next year, such a strong rate of earnings growth will be difficult to achieve. Alternatively, if one uses more reasonable assumptions, it does seem possible that earnings growth could reach high single digits in 2016. Part of the reason for this has to do with the fact that the hit to energy and materials companies from low commodity prices should roll off, consumers may begin to spend their oil savings and both economic and corporate fundamentals should remain supportive. Thus, while the 3Q numbers are disappointing and investors may want to adjust their expectations for 2016, earnings growth looks set to return next year, which supports maintaining a slight overweight to U.S. equities within the context of a balanced portfolio.

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 investment strategy.

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