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Strategic Insights

Volume 6, Edition 36 | September 18 - September 22, 2017

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Relax and Unwind

Doug_Walters Doug Walters | Articles

Read Time: 6:00 min


U.S. equities closed Friday little changed from where they began the week. With Fed Chairwoman Janet Yellen getting ready to unwind, we recommend investors take her cue and relax.

Market Review

Contributed by Doug Walters

The S&P 500 ended the week up just 0.1%. While equity volatility was low, Washington volatility was high. Health care and taxes were once again on the docket, and while the Federal Reserve talked about unwinding, tensions continue to wind up on the Korean Peninsula.

Slow and Steady

There were two opposing forces this week: the steady hand of the Fed and the unpredictability of politics. If this decade has taught investors anything, it’s that their portfolios care a lot more about the Fed than they do politics. In our Economics section this week, we discuss the Fed’s plan for its balance sheet and rates. In general, what we see from the Fed is the continuation of a well-telegraphed, gradual withdrawal of the stimulus that has helped support equities since the Financial Crisis.

In politics, the latest attempt at health care reform failed again this week, while progress on tax reform continued. But it was the feud with North Korea that dominated the headlines. President Trump announced new sanctions aimed at closing some of the few remaining doors North Korea has open to the rest of the world economically. The sanctions, combined with Trump’s speech to the U.N. General Assembly, ratcheted up the war of words, with the leaders of both countries exchanging personal jabs. North Korea further escalated the tensions with the threat of an open-air nuclear test.

Prepare and Enjoy

With seemingly so much turmoil, it is tempting for investors to fear the worst. However, fear is an emotion that leads to irrational investor behavior. At Strategic, we do not fear the next downturn, but we do prepare for it. Investors should be like the residents of Miami Beach: always prepared for a storm, but when the weather is beautiful (and it usually is), they are enjoying the sunshine to the fullest. Right now, the economic sun is still shining.

Indices & Price ReturnsWeek (%)Year (%)
S&P 500 0.111.8
S&P 400 (Mid Cap)0.86.5
Russell 2000 (Small Cap)1.36.9
MSCI EAFE (Developed International)0.717.4
MSCI Emerging Markets0.027.8
S&P GSCI (Commodities)0.50.0
MSCI U.S. REIT Index-2.30.2
Barclays Int Govt Credit-0.11.0
Barclays US TIPS-0.40.8

Economic Commentary

Contributed by

Yellen Plans to Unwind

Federal Reserve Chair Janet Yellen held a meeting this week indicating she would raise interest rates later this year and that the much-anticipated unwinding of the Fed’s balance sheet would begin next week.  Similar statements in that past have spooked the stock market on fears of higher interest rates, but Yellen was careful to point out that monetary tightening would be very gradual as she laid out a plan that would allow a maximum of $10 billion of bonds to mature without reinvestment. Yellen pointed out, “the basic message here is U.S. economic performance has been good.”

Quantitative easing was first initiated during the Financial Crisis to stimulate the economy by reducing borrowing costs for homeowners, businesses, consumers, and other borrowers. Now that the program is in the early stages of unwinding, the concern is that borrowing costs will increase and stall economic growth.


For now, low inflation (a measure of which is shown above) is allowing the Fed to be slow and deliberate in their moves to normalize interest rates and the balance sheet. If inflation were to pick up at a faster than anticipated rate, the Fed would be forced to increase the pace of the balance sheet unwinding and the interest rate increases. When asked about the low inflation rate, the Fed Chair responded, “I can’t say I can easily point to a sufficient set of factors that explain this year why inflation has been so low.”

Week Ahead

Contributed by

A GEM of a Week

German elections will be held on Sunday, September 24.

  • The incumbent, Angela Merkel, is leading the polls by a wide margin and is expected to win.
  • Angela Merkel has been the Chancellor of Germany since 2005.
  • The right-wing Alternative for Germany (AfD) party stands to become the “opposition party.”  AfD is anti-immigration and staunchly pro-Russia.

Economic Data on consumer spending and confidence may shed more light on the health of retail heading into the holiday shopping season.

  • Consumer Spending growth in August is expected to remain weak while the Consumer Confidence Index for September is expected to linger near a 10-year high.
  • The shift in consumer preferences to eCommerce retailers like Amazon claimed another victim this past week, with Toys”R”Us filing for bankruptcy.

Manufacturing data will be released this week as well.

  • Manufacturers’ shipments and order growth for August is expected to improve vs. the prior month.
  • Several Federal Reserve districts will release their surveys on manufacturing activities. Nearly all of the Fed regions estimate flat or sluggish growth for manufacturing in September.

Strategy Updates

Contributed by Max Berkovich ,



The U.S. 10-year Treasury Bond yield jumped this Wednesday after the Federal Reserve Bank’s meeting. During the news conference, Janet Yellen reconfirmed to investors that a 3rd rate hike in December is on the table (details above in the Economics sections).

  • By Friday, the U.S. 10-year Treasury yields have declined, retracing most of Wednesday’s upward move and making it feel like the Fed’s plan is a non-event.
  • Bloomberg’s World Interest Rate Probability (WIRP) jumped to a 63.8% probability of a Fed rate hike in December. This is a big change from the 28% probability we quoted two weeks ago in the “Three’s a Crowd” edition of Insights.

Looking Eastward

Fast growing economies like China and Taiwan have made a huge impact on the MSCI Emerging Markets Index weights. Over 34% of companies in the MSCI EM Index are domiciled in China and 15% in Taiwan, while a much smaller percentage (8.5%) are domiciled in another large emerging economy, India. While the rate of GDP growth in Taiwan and China have been declining, India continues to grow.

  • The IMF estimates India’s GDP growth will rise to 7.2% in 2018 from 6.6% in 2017.
  • According to data from Ministry of Statistics and Program Implementation (MOSPI), India’s national savings have nearly doubled since 2009.
  • India’s debt to GDP is around 70%, while China’s debt to GDP rose to over 300% in 2017.

Asset allocators may need to consider being more selective when allocating to emerging markets, as some of the biggest constituents are looking more like developed economies.


Hurricane Dislocations

The Consumer Staples sector was a laggard due to a jolt from a beverage company that brought up a risk to earnings caused by the multiple hurricanes. The Materials sector, on the other hand, was the leading sector because of a perceived boost the sector will receive from the post-hurricane rebuilding.  In other strategy news…

  • Alphabet Inc. (GOOG, GOOGL) spent $1.1 Billion this week acquiring part of Taiwanese cellular phone maker HTC Inc. (HTCKF). The terms of the deal are complex, but it appears that Alphabet will purchase the employees and operations of the unit that developed the Google Pixel phone and non-exclusive rights to some intellectual property.


Health Check

The Industrial sector was a clear winner this week, while the move in interest rates pressured REITs and Utilities down. Surprisingly Telecom continues to move higher despite other high-yielding sectors declining. In other news…

  • Health insurer Anthem, Inc. (ANTM) inked an agreement to purchase HealthSun, a privately-owned healthcare delivery and Medicare provider in Florida, for an undisclosed amount.
  • CVS Health Corporation Inc. (CVS) found itself bruised by an Amazon (AMZN) rumor. This rumor claims that the online retailing giant was negotiating with a “mid-market” pharmacy benefits manager to compete in the lucrative mail-order pharmacy game. Also, CVS announced they would limit the duration and dosage of opioid painkillers to help combat the growing addiction epidemic.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.8 billion.