The Thin Fed Line
Michael Leist
Ahead of a big decision from the Fed, stocks found some solid footing and posted their best gains in eight weeks.
Market Review
Ahead of a big decision from the Fed, stocks found some solid footing and posted their best gains in eight weeks.
Risky Business: Traders, and even long-term investors, tend to reduce activity and rein in positions to control risk ahead of uncertain outcomes on important events.
- Along with concerns about China’s growth, the recent volatility was driven by market participants preparing portfolios for next week’s Fed call (see below and left).
- We maintain a view that the domestic economy is on solid ground and global growth concerns are overdone.
- The 1st correction (10% sell-off) in years is therefore a healthy pause that allows fundamentals to catch-up to stock prices and set the stage for future gains.
- Expect more volatility on the path higher due to the impact of dollar strength, China’s opaque data, lingering valuation concerns and Fed’s policy regime change.
United They Stand? The refugee tragedy has exposed conflicting EU policy interests with broad implications.
Economic Commentary
This week we take a look at the drop in consumer sentiment, one of the last data points before Fed officials meet next week to consider an interest rate hike.
Confidence Game: The global turmoil seen over the past few weeks may finally be having an impact on the U.S. consumer. According to the University of Michigan, consumer sentiment levels dropped from 91.9 to 85.7.
- The dip in sentiment stands in sharp contrast to the persistent rise in recent years.
- What Does It Mean? The graph below shows that consumer sentiment had stalled since the start of the year after a multi year rally.
- However, even after the recent slide, sentiment stood at healthy levels for the 1st time since the crisis and helped to prop-up consumer spending.
- The recent fall opens up the possibility that the sell-off in equity prices over the past few weeks may be taking a toll on a fragile consumer psyche. A drop in equity prices makes consumers feel poorer, leading to a drop in the projected spending outlook.
One Last Data Point: Federal officials will consider a host of metrics before deciding on the timing of the rate hike. Consumer sentiment is sure to feature prominently in that discussion.
*The dip in the data may give cover to those who have advocated for a more patient approach, concerned that the global market troubles may spillover into domestic economic growth and make a rate hike premature.
Looking Ahead to Next Week
Contributed by Michael Leist
Fed Up? All eyes will be on next week’s Federal Reserve policy meeting to see if committee members are finally ready to raise the benchmark interest rate.
- Strategic insiders are calling for a rate hike, but we encourage investors to focus on pacing and Fed messaging, rather than the timing of a rate increase.
- Ahead of the meeting, investors will be eyeing key reports on retail sales, industrial production and housing starts, which could have an impact on the Fed’s decision.
Round II: The top 11 GOP hopefuls are set to debate in California on Wednesday, with Carli Fiorina being named as a late addition to the main lineup.
- Contenders will be looking to steal support and air time from ”The Donald” who still leads polls by a wide margin over Jeb Bush, Scot Walker and the pack.
Game, Set, Match: The U.S. Open tennis tournament, the final grand slam of the year, reaches its climax with the men’s and women’s finals this weekend.
Investment Strategy Update
Contributed by David Lemire , Max Berkovich
STRATEGIC Asset Allocation
Emerging Value: Investors who include Emerging Markets in their diversified portfolio were rewarded this week with strong EM equity performance..
- Importantly, this occurred despite weak China trade data, and Brazil’s debt being cut to junk by Standard & Poor’s; perhaps a signal that prices for the asset class fell too far.
- The emerging market index was down around 20% on the year at its worst moments but pockets of value have emerged on the dislocation. Fears about tighter global monetary policy amid continued slow economic growth persist.
- The longer-term return potential for EM is starting to look attractive despite continued bouts of elevated volatility.
STRATEGIC Growth
Going Hostile: Technology and Healthcare stocks returned to their place as leading sectors. Speaking of a return…
- Mylan Inc. (MYL) didn’t wait long after Perrigo’s (PRGO) management rejected its offer to go hostile. Going hostile means a direct to shareholder appeal for approval of the merger. The offer is $75 cash and 2.3 shares for each Perrigo share. Strategic has issues with the strategy.
STRATEGIC Equity Income
The General on the Move: The industrial sector caught fire this week while energy stocks ran out of fuel. In other news…
- General Electric (GE) continues its transformation with several notable transactions. The EU approved GE’s acquisition of Alstom (ALSMY) a French power infrastructure company. The company sold its transportation financing unit and put its asset management unit up for sale. Also, GE is rumored to be looking to move its HQ out of CT.
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