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Strategic Insights

Volume 4, Edition 34 | September 14-18, 2015

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When Doves Cry

FILE_MAX_BERKOVICH_SHORT_2021 Max Berkovich | Articles

Read Time: 4:30 min


In a volatile week, stocks closed flat, but on a low note, as the Fed left interest rates unchanged in a nod to the recent market turmoil and sluggish global growth.

Market Review

In a volatile week, stocks closed flat, but on a low note, as the Fed left interest rates unchanged in a nod to the recent market turmoil and sluggish global growth.

What Else? The Fed’s decision, ably covered in the adjoining columns, dominated the action, but markets are more than just 10 ‘black box’ policymakers…right?

  • Well, of course, but investors can be forgiven for a myopic focus on a decision that touches everything from mortgage rates to international trade via the $.

The Elephants in the Room: Republicans packed the Reagan Library in a disjointed attempt to establish a clear front runner to challenge the Dems in 2016.

  • The rise of Trump, while comical, added to uncertainty in recent weeks. He effectively tore down anointed candidates which created chaos that markets frown on.

Knicks Next? Cable industry consolidation continued as the Dolan family sold out CVC for the hefty sum of $10B.

  • Unfortunately, they plan to hold on to the NY Knicks.

Economic Commentary

Amidst fanfare and rampant guesstimates that saw economists, pundits and investors split on the best course of action, the Fed kept interest rates unchanged,

No Hike After All: For those hoping to finally move on from 6 years of rock bottom rates, the news was disappointing. Is the economy at risk?

  • The feeling is that FOMC officials want to hike but fear repeating past policy errors (see Great Depression).
  • The recent turmoil in global equity markets and slow international economic growth added to that fear.

Backdrop: The economic slowdown in emerging markets, especially China, can have spillover effects into the U.S. which demands respect from the Fed.

  • In addition, inflation, part one of the Fed’s dual mandate, has stayed persistently below target.
  • Unemployment data has improved but proven to be incomplete in assessing the true health of the labor markets and the potential for wage pressure.

Someday: With Thursday’s announcement, the Fed has once again clearly stated its priorities.

  • They are less about asset bubbles developing and more concerned about the possibility of a fragile recovery derailed by turmoil in emerging markets. This caution is understandable.
  • At some point, however, the Fed will have to let go of the strings and show that the economy can function without life support. The sooner the better.

Looking Ahead to Next Week

Contributed by Aaron Evans

Moving on Up?  The latest round of U.S. home sales data comes after Fed Chair Yellen described the residential real estate market as “very depressed”.

  • In particular, Yellen stated that housing starts are not consistent with the job growth and wage growth seen in the U.S. labor market over recent months.

P-Mobile:  Following a trip to Cuba, Pope Francis will be visiting the U.S. next week. Stops at the White House, Congress and the U.N. are on his itinerary.

  • The Vatican is hoping that this trip could help continue to foster Cuba-U.S. relations and bring an end to the 53-year embargo against Cuba.

Snap to it:  Greece will be holding yet another snap election next week for the Prime Minister seat, with the top candidates in a heated race.

  • This is the fifth prime minister election held within the past six years as the nation continues to struggle with economic turmoil.

Investment Strategy Update

STRATEGIC Asset Allocation

Hold On: While history will show positive returns for many asset classes this past week, the Fed’s decision to keep rates on hold created reverberations visible in the daily detail. Bonds rallied on the announcement as expected, yet growth assets, such as equities, were down.

Not So Easy: While easy monetary policy is generally supportive of equities, the lack of Fed action raises concerns for investors: 1) the economic environment is not robust enough for the Fed; 2) there is more uncertainty now on the timing of the eventual rate liftoff. We see this likely to overhang equities in the near term.

Re-rate: REITs are one growth investment that benefited from the Fed’s decision. REITs tend to be very sensitive to interest rate moves in the near-term. However, longer-term it is economic activity that drives REITs, so we see no reason to chase this mini rally.


Sink Your Teeth on This: Until Friday, the energy sector was having a stand-out week. In other strategy news…

  • Sirona Dental Systems(SIRO) will combine with Dentsply(XRAY) in an all-stock merger of equals. The combo will form the world’s largest manufacturer of dental supplies.

STRATEGIC Equity Income

Something Brewing: Without a lift off in interest rates , utilities and REITS had a strong bounce. Conversely, bnks reacted negatively to the lack of action from the Fed. In other news…

  • PepsiCo(PEP) and Coca-Cola(KO) were drawn into the biggest M&A rumor of the year. No, the two of them are not merging, but rather two big Beer brewers, Anheuser-Busch(BUD) and SABMiller(SBMRY) are looking to merge. This impacts the two soda makers as they have bottling deals with the brewers.

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