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Central Bank Worries?

Weekly Commentary, 9/05/16 to 9/09/16

U.S. equity markets finally broke out of their multi-month range this week. Unfortunately it was to the downside.  Central bank worries were the root of the problem.  The selling was a reminder of how the long-running rally in stocks and bonds is dependent on central bank support.   

In the U.S. investors continue to grapple with the continual jawboning emanating from Federal Reserve officials.   Friday Eric Rosengren, Federal Reserve Bank of Boston President, who has tended to be more dovish, stated “a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy” which helped push the markets down over 2%.   Later in the afternoon, Robert Kaplan, President of the Federal Reserve Bank of Dallas said in an interview “we have the ability to be patient.”  The markets do not like uncertainty and mixed messages can undermine confidence in the Federal Reserve.  Fed Chairwoman, Janet Yellen, has until the September 20-21 meeting to form a consensus whether to raise rates or wait until later in the year. 

Thursday the European Central Bank decided not to expand its bond buying operations rather than expanding it as many expected, but left the door open for future action.  Yields on the German 10-year bond, which have been in negative territory since BREXIT, turned positive Friday.  The DAX lost 1% for the week. 

The Bank of Japan faces a different problem.  The supply of government bonds to buy could be running out.  Analysts estimate banks could run out of bonds to sell within 18 months.  The BOJ, which meets the same week the Fed does, is weighing whether to add to its own stimulus efforts. It will be announcing the results of its “comprehensive assessment” of the effectiveness of its monetary policy on September 21.  Ten-year Japanese yields are narrowly positive, having spent the bulk of the year in negative territory.

Investors are left to ponder the potential impact of higher rates and if the benefits of easy monetary policies could be reaching their limits. 

Friday major U.S. equity markets had their worst day in months.  Friday was the first day in 43 days that the S&P 500 Index moved more than 1 percent in either direction.   Early in the week it looked as if the extraordinary tight trading range would continue throughout the week, but central bank worries weighed on stocks to end the week.  The steep decline on Friday should not come as a surprise given the rarity for the equity markets to trade in such a tight range as we have seen since mid-July. For the week the S&P 500 and the NASDAQ each lost about 2.40% while the Dow Jones shed 2.20%

Yields on U.S. Treasury 10-year notes rose to 1.67%, the highest levels since June 23. Volatility, as measured by the CBOE Volatility Index (VIX), jumped to 17.50, its highest level since June.  In June the VIX went on to reach 26 before quickly retreating. 

From a technical standpoint, the S&P 500 did break some short term support levels and the Stadion proprietary indicators began to detect some risk entering the market but at this point it could be just noise.  The most recent price action and consolidation begs the question:  In what direction will the next major move take the market?  As we wait, we will continue prudently to manage our strategies with an eye on risk.

Next week will be critical for the markets as we have 3 Fed speakers before they enter the blackout period before the September 20-21 FOMC meeting.

The summer lull appears to be over.

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 VIX is the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period. The DAX is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. 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.

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Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.