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High (Rate) Anxiety

Weekly Commentary, 10/3/16 to 10/7/16

U.S. equities finished the week lower but the real story is anxiety over the prospect of higher interest rates.  Responding to concerns, the Dow Jones Index lost -0.37% and the S&P 500 Index shed -0.67% as holdings in interest rate sensitive sectors rotated toward financials.  REITS sank -5.26%, utilities dropped -3.81% and gold lost -5% of its luster.  Financial stocks benefited with banks rising +2.83%.  The yield on the 10-year Treasury note rose to 1.73% from 1.60%. 

Nervousness about the future of central bank stimulus swept through the market.  Rate fears were elevated after the releases of stronger U.S. economic data and amid comments from Federal Reserve Bank of Cleveland President Loretta Mester, who reiterated her call for a December rate increase.  Overseas, the Bank of Japan is shifting its stimulus efforts, which could potentially reduce purchases of long term government bonds.  And on Tuesday Bloomberg fanned the flames, reporting the possibility of a tapering of bond buying by the European Central bank. 

BREXIT jitters have also resurfaced after a quiet summer.  British Prime Minister Theresa May said that she will begin the U.K.’s withdrawal from the European Union in the first quarter of 2017.  Repercussions were felt when German Chancellor Angela Merkel signaled a tough stance, warning that the U.K. would not get special treatment.  If exceptions are made for Britain then other countries might  follow and the EU will cease to exist.  The British pound dropped -4% to a 30-year low against the dollar on the latest BREXIT news. 

Nonfarm payrolls rose 156,000 in September, less than expected, with the jobless rate rising to 5.0% from 4.9%.  The release was not enough to change the likelihood of the Fed raising rates in December.  Fed funds futures show roughly a 66% chance of a rate hike at the December FOMC meeting.  Oil prices traded near $50 per barrel for the first time since June.

Uncertainty is rising as earnings season approaches.  Third quarter earnings from S&P 500 companies are expected to drop -2.1% from a year ago, according to FactSet, marking the sixth straight quarter of year-over-year declines.  Complicating the outlook is the upcoming U.S. presidential election. 

Technically, we still see adequate price trends and market breadth to support full equity exposure in our tactical strategies.  But over the past 11 to 12 weeks we have seen a consolidation and narrowing of technical support and resistance levels.  We believe the convergence of the two will likely lead to a breakout in one direction or the other very soon.  

Through the latest period of uncertainty, the S&P 500 Index continues trading within the narrow band in which it has spent the last several months, struggling to recapture its 50-day moving average.  The upcoming weeks may be critical in determining the direction of the next trend as we move into the fourth quarter.  We will stay focused on seeking the proper asset allocation for our strategies and continue to emphasize maintaining the proper levels of risk for the current environment.  

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 Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. 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.