Earlier this month, we indicated September would be interesting as we anticipated the results of the next Federal Reserve policy meeting and increased chatter regarding the appointment of the next Federal Reserve Chairman (or woman!). With the S&P 500 index up 2.2% for the week as we write this, we have not been disappointed and we want to share our views of the major headlines which sparked this rally.
This week started with Sunday’s announcement that Larry Summers, the presumed leading candidate, withdrew his candidacy to be the next Federal Reserve Board Chairman. The markets viewed this positively, as Summers was generally believed to be more “hawkish” than other candidates and most likely to withdraw the Fed’s quantitative easing (QE) policies more quickly (i.e. “tapering”). The remaining candidates, including Janet Yellen, are viewed as more “dovish” on QE and markets rose globally in anticipation of a more gradual tapering, with interest rates to remain at low levels for a longer period of time. As the Fed’s mandate is to maintain price stability and low unemployment, many believe the weak economic data continue to support a highly accommodative monetary policy.
Yesterday afternoon, stocks rallied again after Fed comments revealed that, contrary to consensus, the Fed will not taper their purchase of Treasuries and mortgages in September. Further, the Fed signaled that it would await more evidence that economic progress can be sustained before adjusting the level of purchases. Importantly, the Fed’s inaction caused interest rates to drop with the benchmark 10 year U.S. Treasury note falling from 2.85% to 2.69% just yesterday. This fall in rates will ease concerns over the sustainability of housing gains as mortgage activity, especially for refinancing had recently stalled as a result of rising mortgage rates.
This news from the Fed, which drove stock prices higher and interest rates lower, added to the weakening U.S. dollar, which is now at seven month lows. These factors, combined with more favorable economic data from China, accelerated the sharp rally in emerging markets (EM). Yesterday EM stocks were up 3%-4% and, since bottoming in late June, EM stocks are up approximately 20% and have significantly outperformed U.S. stocks. Though this asset class is still slightly negative for the year, we are pleased to see a measure of recognition in the marketplace as we choose to maintain our exposure given compelling valuations and longer-term growth opportunities.
We look forward to speaking with you about these developments and any others that may be on your mind at this time and encourage you to call us if you have any questions.