Peace Out, 2015

As everyone knows by now, in addition to Steve Harvey totally blowing it at the Miss Universe Contest last night, the Federal Reserve ended seven years of near-zero interest rate policy by raising rates 0.25% last week. This indicates its conviction in the vigor of the U.S. economic recovery. It was a unanimous decision by the members of the Committee. The rate increase was certainly no surprise to anyone, so the market reaction to the announcement was positive – stocks rallied and Treasury yields remain mostly stable. For the week, the S&P 500 finished down -0.3% after giving back all the early and mid-week gains.  The Energy sector sustained its volatility as oil prices hit new multi-year lows, finishing the week right around $34.50 per barrel. For the year, the Dow is down -3.9%, the S&P 500 is down -2.59%, while the tech heavy NASDAQ is positive +3.95 YTD on the back of Facebook, Amazon, Netflix and Google.

Fed Tightening Has Begun.

In some respects, it was the moment we were all waiting for. These were emergency rates implemented during the darkest days of the 2008 financial crisis. In reality, I think is was more of a symbolic move than a real impactful one since short-term rates remain exceptionally low.  Money is still very cheap.  Below is a chart of the Fed Funds going back to 1983.  You can see the little blip on the very right showing the raise from last week.  Relative to history, I’m comfortable with the term “symbolic.”

It’s interesting to look back at the past seven years because there were a lot of forecasts predicting that the Fed’s super-easy monetary policy would bring on dire consequences.  Remember all that prognosticating that low rates and trillions of dollars in Quantitative Easing would produce hyperinflation, a collapse in the dollar, and a foreign flight out of Treasuries?

Well that never materialized.

But at the same time, the super accommodative policy did not fuel a strong economic expansion, either.  It’s true the stock market has recovered from 2009 lows and more people in the U.S. are working than ever before, but this recovery has been among the weakest in the modern era.

In other words, there have been limits to what the Fed can do to promote economic growth.

Some Economic Data

Auto sales are rocking.  I write and say this all the time…housing and cars.  So much of our economy is about housing and cars.  Below is a Bespoke chart showing U.S. auto sales going back to 1976.  Recession periods are shaded in gray.  You can see auto sales usually roll over prior to the start of a recession.  I don’t see anything resembling a rollover yet.

2016 Thoughts

In case you missed what I wrote last week, I’m republishing my thoughts again this week.

“You can’t swing a dead cat without hitting a Wall Street strategist talking about his or her 2016 outlook.  I’ve become cynical about annual outlooks – there is nothing really magical about the change from one calendar month to another, since it does not signify any real impetus for economic change.  Things just don’t change that quickly and I feel like my thoughts are always…how do I put this…rolling.  So while the following are some thoughts for the next 12 months and they are coming in December, I’m not really sure they are any different than my thoughts from July.

Every year since March of 2009, investors have witnessed negative events, news stories and market shocks right alongside constant negative investor sentiment.  However, somehow the economy has accelerated and equities have ranged from buoyant to outright resilient. I think the next 12 months will bring more buoyancy than outright resilience to the equity market.  Concerns like a strong(er) U.S. dollar, declining oil prices, anemic manufacturing and a shift in Fed policy can exacerbate negative investor sentiment, but I believe it’s important to also focus on all the good things from above: positive consumer spending, the improving labor market, rising wages, and cheaper gas. These should offset the concerns. When the Fed starts raising rates, it will not be by a lot and will not be quarter-over-quarter, which means the Fed will remain accommodative to equity investors.

Finally, we are always on the lookout for over-borrowing, over-spending and over-confidence as a prelude to any recession.  We see none at this time.

I don’t see any reason why a long-term investor would move away from the equity markets or get defensive within the equity market over the next 12 months, which is something we have been saying for a long time.”

Happy Holidays

I hope all of our clients, future clients, readers – especially those who are going to be future clients but don’t know it yet – advocates, friends, family and those who have always lent a supporting, helping and encouraging hand have a very happy holiday season.  I won’t be back with another writing until next year, so I look forward to reconnecting with everyone again in 2016 when I recap some data from the 2015 calendar year and provide some more thoughts on the year ahead.

– David B. Armstrong, CFA

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