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Don’t Fear the Fed

Weekly Commentary, 03/13/17 to 3/17/17

All the major U.S. equity indices saw gains this week. The Dow Jones Index added 0.06%, the S&P 500 gained 0.24% and the Russell 2000 Index rallied 1.92%.

Last week’s rally began immediately following the Federal Open Market Committee (FOMC) meeting on Wednesday and Federal Reserve (Fed) Chairwoman Janet Yellen’s news conference that was less hawkish than expected. The Fed raised rates for the third time in 15 months and the second time in three months. The move was prompted by stable economic growth, a favorable unemployment rate and inflation moving toward the central bank’s target. Some feared the Fed would raise their forecast for future rate hikes to do more to slow the economy’s growth. Their fears were unfounded as the Fed’s “Dot plot” was unchanged for 2017. 

International developed market equities benefited from the Fed statement and the results of the Dutch election, which dealt a blow to the rise of populism in Europe and bodes well for the French election next month. British lawmakers removed the final obstacle facing Prime Minister Theresa May implementing Article 50, the legal mechanism to start the two year BREXIT negotiation process. The Stoxx Europe 600 rose 1.27% and the MSCI EAFE Index gained 1.93%.

After trailing the U.S. markets for the last five years, the MSCI Emerging Markets Index continued its recent outperformance, tacking on another 3.90% and now up almost 13% year-to-date versus the S&P 500’s gain of 6%. 

The less hawkish Fed statement eased the pressure on interest rates with the yield on the benchmark 10-Year U.S. Treasury note falling from 2.60% to 2.50%

After closing down for 9 straight days, oil caught a bid rising 1.69% on hopes of production cuts from OPEC but remaining below the psychologically important $50 per barrel level.

Technically the up-trend remains intact for now. Bull markets are characterized by persistently positive days, positive momentum, and low volatility.  We remain in a persistently low volatility environment with average daily trading ranges that are very small. It has now been 108 days without the S&P 500 falling 1% on a daily basis. Bear markets on the other hand, are characterized by large single day moves, daily reversals & high volatility. 

It is reassuring to see small cap stocks outperform this week.  Small -caps had been lagging while trading sideways since December.  Is this an early warning sign or is this part of “Trumpenomics”?  Usually, small -cap underperformance is a potential early warning sign, but small-caps are still trading just a touch under their all-time highs. Small caps were the poster child for the Trump victory in November last year (up near 33%). Recent underperformance could just be some consolidation until we begin to see regulatory roll back, tax cuts, and infrastructure spending bills.  Weak energy prices have really hurt small-cap energy stocks which account for most of the small cap lag since mid-December. For now, we believe the trend remains our friend.

Stadion Tactical Growth Strategy: As a dynamic asset allocation strategy, the Stadion Tactical Growth Strategy follows an investment framework that analyzes the Sharpe ratio of over 1500 Exchange Traded Funds (ETFs) over multiple time periods each day. Given the simplicity of the Sharpe ratio, we believe we get a unique lens into market activity by seeing the interaction of return and risk. The proprietary ranking system will generally narrow our focus to those ETFs that track well known asset classes, indexes, and markets. We believe this disciplined process will guide us toward the best asset allocation, which means at times, we won’t use bonds for diversification or our equity asset class allocation won’t resemble the traditional capitalization structure.  Minor changes were implemented over the week.  Cash, broad market and small cap ETF holdings were reduced and replaced with two sector ETFs.  By our definitions, the strategy is roughly 73% correlated to U.S. equities.

Stadion Tactical Defensive Strategy: The Stadion Tactical Defensive Strategy uses a weight of the evidence model combining two trend-following elements to determine risk levels in the market. One element focuses on longer term cyclical trends (the core) and the other seeks to balance safety and return among shorter to intermediate trends (the satellite). The satellite and core portions of the portfolio are fully invested. There were no changes in the strategy’s holdings over the week.

Stadion Managed Risk 100 Strategy: The Stadion Managed Risk 100 Strategy, Stadion’s most conservative tactical strategy, uses a weight of the evidence model which focuses on shorter term trends to determine risk levels in the market and the most appropriate asset allocation. The shorter tem risk measures continued their recent improvement. The portfolio is fully invested. There were no changes in the strategy’s holdings over the week.


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 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 Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. 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 EURO STOXX 600 Index represents large, mid and small capitalization companies across 18 countries of the European region. The MSCI EAFE (Europe, Australasia, and Far East) Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. 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. The core personal consumption expenditures index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices. 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.