Investment Commentary – December 17th, 2015
Market Indices as of Market Close December 17th, 2015

Dow 17,749 (-0.42% YTD)
S&P 2,073 (0.69% YTD)
NASDAQ 5,071 (7.08% YTD)
Global Dow 2,356 (52 week low 2,203/high 2,644 )
10-year Treasury 2.25 (52 week low 1.64 /high 2.50)
Gold 1,063 (52 week low $1,045/high $1,306)
Oil $35.27 (52 week low $34.53/high $65.56)

The Fed Awakens

The long-awaited interest rate hike by the U.S. Federal Reserve is now a reality. Perhaps more important to investors, policymakers indicated that they may not be in a rush to tighten further.

As the NASA hands at Mission Control might say, “We have liftoff.” The U.S. Federal Reserve’s (Fed) policy-setting arm, the Federal Open Market Committee (FOMC), delivered its long-promised 25 basis-point increase in the fed funds rate at the conclusion of its meeting on December 15–16. The Fed’s last rate hike was in June 2006.

In a communiqué released at the conclusion of the meeting, the FOMC said that economic activity was expanding “at a moderate pace.” Policymakers also noted that “there has been considerable improvement in labor market conditions this year, and

[the FOMC] is reasonably confident that inflation will rise, over the medium term, to its 2% objective.” And then, the money quote: “Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2%.” Execution of the rate hike will involve an increase in the interest paid on excess reserves within the banking system, which will then be combined with reverse repurchase transactions with entities outside the banking system to bring the level of fed funds to their new target.

While the policy move was expected, the great unknown—and likely, the chief hope among investors—was for Fed guidance on the speed with which future rate hikes would be pursued. The Fed did not disappoint. Important comments featured in the release assured investors that future increases would be “gradual.” That language was clearly designed to signal a slow adjustment process. Indeed, the Fed reassured markets that “monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation.”

Thought of the week

Oil prices experienced a fresh wave of pessimism following the OPEC meeting on
December 4th, when the cartel maintained production at its current level of 31.5
million bbl/day. While largely expected, the move effectively removes the ceiling on
OPEC production, thereby increasing production in the midst of a supply glut.
OPEC’s strategy over the past 18 months has been to maintain market share at the
expense of other non-OPEC producers, namely U.S. shale players, and ultimately
price them out of the market. With both U.S. and OPEC production increasing, more
pain should be felt in the energy sector. However, given OPEC’s persistent strategy,
there have been signs of future waning production in the U.S. as companies scale
back on replacement capex and active rig counts continue to decline. Inevitably, these
measures will lead to less output in the longer term, with agencies such as the EIA
and IEA expecting U.S. production to decline by 0.5 million bbl/day and demand
increasing by 1.6 million bbl/day in 2016. Energy-related securities in both equity and
fixed income markets will likely experience pain in the near term, but value may be
found in companies with low debt levels, efficiencies of scale and strong balance
sheets who can successfully manage through the current low price environment.


December 17th 1835: A disastrous fire rages through Manhattan, destroying the New York Stock & Exchange Building — but Wall Street breathes a sigh of relief anyway. A strongbox of documents showing who stands to gain and lose from the manipulation of stock prices is rescued from the flames by a brave (or desperate) broker. His grateful peers promptly give him a generous cash reward.

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.

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