Weekly Commentary, 9/19/16 to 9/23/16
It was a positive week for global equities (markets) following the announcements from the Bank of Japan (BOJ) and the Federal Open Market Committee (FOMC) meetings. The BOJ’s announcement was being closely watched by other central banks because it came after a comprehensive review of its previous policies that have failed to spur inflation or economic growth and were potentially reaching the limits of their effectiveness. Japan’s central bank policies are potentially important ‘canaries’ because soas many countries are experiencing slow growth and too-low inflation assess the Japan’s practices as the longest term combatant. Japan has been fighting the battle the longest.
Among the other changes, the BOJ shifted the focus from expanding the money supply (monetary stimulus) to controlling interest rates through the shape of the yield curve will beas the foundation of its new policy framework. This is a change from the BOJ’s prior strategy, which involved fixed purchases of government bonds. That is a switch from its previous strategy of buying a fixed amount of government bonds at any price. The BOJ kept short-term interest rates unchanged at -0.1% (-10 basis points) but said it wanted to keep a floor on 10 year yields at, or near, 0%. The markets perceived this to be another “we will do whatever it takes” moment from a central bank.
As widely anticipated, the FOMC voted to hold short term rates at current levels. The FOMC also lowered its projections for year-end levels of the fed Fed funds rate by 0.50% for both 2017 and 2018 to 1.1% and 1.9% respectively. While making the case for holding rates steady, Chairwoman Yellen stated “we judged the case for an increase had strengthened but decided for the time being to wait for continued progress toward objectives.” The decision highlights the challenge Ms. Yellen faces with divergent views on the path to rate normalization. There were three dissenting votes on the panel, a historical high. Three dissenting votes is historically high. According to Macro Risk Advisors it has only happenedbeen equaled only 4 times since 1993.
Investors celebrated the BOJ and FOMC’s decision, and what appears to be another three month reprieve. Despite losing ground on Friday, the major U.S. equity indexes posted gains for the week. The Dow Jones Industrial Average added +0.76%. The S&P 500 Index and the NASDAQ Composite tacked on gains of +1.2%, which included two days of new all-time highs for the NASDAQ. The Russell 2000 Iindex outperformed, rallying +2.4%. Fears of higher rates have faded as the yield on the benchmark 10-year Ttreasury note fell to 1.615%, falling from . The same security was trading at 1.75% two weeks ago. Internationally the news was also well received,. The Nikkei 225 gained +1.42% and the Europe Stoxx 600 added +2.23%. With rates lower longer gold powered ahead +2.40%.
Technically the market improved over the week and remains resilient in spite of mixed economic indicators and the uncertainty surrounding the U.S. elections. Small cap stocks continue to outperform and large cap stocks. The advance-decline line is back to near all-time highs.
Other than a few days, September 2016 is not living up to its reputation as a volatile month. A few trading days remain and we are about to enter the heat of the presidential campaign.
For now, it appears the markets are comfortable with continued global bank accommodation and rates lower for longer. This luxury will not last forever. As stewards managing our client assets it is not a time to be complacent. We will continue to consistently maintain what we believe to be a disciplined risk management process for when conditions change.
The Stadion Managed Accounts risk objectives are managed using a “core/satellite (Flex)” approach. The core positions will comprise 40-60% of the portfolio and are invested in equity, fixed income and money market instruments with the strategic allocation becoming more risk averse as the risk tolerance of each fund changes. In allocating the objective’s Flex assets (the remaining 40-60% of each portfolio), Stadion uses a proprietary, rules-based weight-of-the-evidence model. The portfolios are overweight their respective benchmark equity allocation at this time.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares. The Nikkei 225 is a price-weighted stock market index for the Tokyo Stock Exchange and is the most widely quoted average of Japanese equities. The EURO STOXX 600 Index represents large, mid and small capitalization companies across 18 countries of the European region. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The U.S. 10-Year Treasury Note is a debt obligation issued by the United States government that matures in 10 years. The Sharpe ratio measures the excess return per unit of deviation, or risk. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.