Investment Commentary – December 22nd, 2015
Market Indices as of Market Close December 22nd, 2015
Dow 17,418 (-2.27% YTD)
S&P 2,039 (-0.97% YTD)
NASDAQ 5,071 (5.60% YTD)
Global Dow 2,318 (52 week low 2,203/high 2,644 )
10-year Treasury 2.23 (52 week low 1.64 /high 2.50)
Gold 1,072 (52 week low $1,045/high $1,306)
Oil $36.14 (52 week low $35.35/high $65.50)

Thought of the week

The Federal Reserve (Fed) signaled its confidence in the strength of the U.S. economic recovery by raising short-term interest rates 0.25% last week. The move was a unanimous decision by the voting members of the Committee, and it ends seven years of near-zero interest rate policy. The rate increase had been well communicated to the investing community, so the market reaction to the announcement was positive, with stocks rallying and Treasury yields remaining relatively stable. But now that the hurdle of the first rate increase has passed, markets must refocus on the Fed’s expectation for the path of further interest rate increases. While the tone of the statement, projections and press conference was dovish, one hawkish surprise, within the Fed’s projections, was the median forecast for the federal funds rate at the end of 2016, which implies four rate increases next year. This projection is at odds with the market’s even lower expectations for the federal funds rate. While markets responded calmly to the Fed’s action last week, falling unemployment and rising inflation may cause the Fed to stick to its forecast of four rate hikes in 2016 in the end, which could entail more risk to the bond market than is implied by initial market reactions.

Markets Digest First Fed Rate Hike Since 2006

Although widely anticipated, the Federal Reserve’s decision on Wednesday to raise official short-term interest rates for the first time in nearly a decade loomed large over equity and bond markets during the week. Stocks rose sharply in the days leading up to the announcement and immediately afterward, as investors appeared to interpret the Fed’s action as a vote of confidence in the U.S. economy. Stocks gave back their gains late in the week, however, leaving most of the major benchmarks modestly lower. The small-cap Russell 2000 Index fared better, ending roughly flat for the week.

T. Rowe Price Chief U.S. Economist Alan Levenson found few surprises in the Fed’s statement announcing a quarter-point increase in the federal funds rate. As he expected, policymakers indicated that further rate hikes will be “gradual”—although the Fed would have done better to stress “caution,” in his view—and their growth and inflation forecasts remained virtually unchanged. However, he did note that the Fed statement made an explicit reference to the need to reach the Fed’s target of 2% inflation—an apparent nod to members who had been arguing in favor of deferring action. The consumer price index (CPI) for the month of November was unchanged overall, though core—less food and energy prices—CPI showed some improvement, coming in up 0.2%.

Europe Markets Stable Before, After Fed Announcement
European equities rallied following the Fed’s announcement but pulled back on Friday as concerns about underlying weakness in the global economy continued to drag down confidence. The benchmark Stoxx Europe 600 Index slid about 1.1% on Friday but still produced its first weekly gain since the last week of November.

Eurozone bond markets were generally calm following the Fed’s announcement, as the move was widely expected and priced in to markets. Most eurozone bond yields, including the German 10-year bund, fell, although Spanish 10-year yields fell the least as the country is gearing up for uncertain national elections this weekend.

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THIS DAY IN FINANCIAL HISTORY
1973: Meeting in Tehran, the oil ministers of OPECs six Persian Gulf member countries announce that they will unilaterally raise the price of crude oil to $7 per barrel — and that it will go up again, to $11.65, on January 1, 1974. In two-and-a-half months, OPEC has raised the price of oil by 128%.

Happy Holidays from Affinity Asset Management!

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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