PulsePoints > December Investment & Market Update

Gill Capital Partners December Investment & Market Update Condolences & Gratitude

The team at Gill Capital Partners would like to extend our deepest condolences to those whose lives were touched by the recent attacks and violence around the world. In light of these events we are harshly reminded of how fortunate we are. We would also like to use this opportunity to express our thanks and gratitude as a firm and individually to each of our clients and business partners for the trust and confidence that you place in us. We hope everybody has a safe and joyous holiday season.

Below is our December market update, accompanied by thoughts from the Gill Capital Partners Investment Committee.

Market Update

Equities

As of this writing, global equities are up modestly amidst lower volatility than we have seen over the past few months, with U.S. equities pacing the gains. We have so far held on to the significant gains off of the correction lows we saw in August and September.

Fixed Income & Interest Rates

The market seems to have digested the likelihood of interest rate normalization beginning in December (more on this below). As such, interest rates have continued to move modestly higher, with short-term interest rates rising more than those further out on the curve.

Commodities

Oil has continued to struggle and bounce around in the low $40s, recently testing the lows from August. The supply and demand fundamentals have been slow to correct, as cash-strapped producers (corporate and national) have actually increased production in the face of lower prices in order to generate much needed cash. This reaction to lower prices seems to have caught many analysts and major OPEC producers by surprise as most anticipated production to moderate further in the face of significantly lower prices.

Currencies

In anticipation of interest rate normalization, the U.S. dollar has resumed its upward trend against most worldwide currencies. The Dollar’s strength continues to cause issues globally.  We will continue to watch this, as we anticipate further divergence amongst central bank policies in the coming year, which may further exacerbate global currency volatility.

Federal Reserve Update

The Federal Reserve has received significant criticism recently for not raising rates and for a general lack of clarity, which in turn created an environment of uncertainty and heightened volatility. In recent months however, the Federal Reserve has clearly indicated to markets that the first interest rate increase is likely coming in December. They have further informed markets that subsequent increases will be data dependent and likely to occur at a measured pace.

Our view:  Janet Yellen and the Federal Reserve seemed to have heard loud and clear from the markets that it is time to raise rates, and that their messages need more clarity and conviction. The past couple months we have seen The Federal Reserve telegraphing to the markets that it is time. Policy normalization is coming and likely in December.  At Gill Capital Partners, we are not alone in our belief that it is very appropriate to begin raising interest rates. We do not believe a .25% increase in short-term rates will be all that impactful in the real economy, and that it will actually help certain sectors of the economy (namely banking). Furthermore, the general public and the media continue to focus perhaps too much on “when” rates will go up, and seem less focused on what we believe to be more important, the pace and eventual peak level of the interest rate cycle. We continue to believe that this rate normalization cycle will be slow and shallow. Why? Below are a few bullets on why we anticipate a very benign interest rate normalization cycle:

• Besides real estate prices, most inflation drivers remain low.
• Many central banks globally will see continued easing while the U.S. will be increasing rates. If the Fed is not careful and methodical, this global policy divergence will strengthen the U.S. Dollar to levels that would not be healthy for the global economy.
• The Federal Reserve does not want to increase rates at a pace that would put U.S. Economic growth in jeopardy.

Of course, all of this could change if real inflation begins to pick up, particularly wage growth, but at this point we do not see much likelihood of this indicator quickly rising or dramatically higher rates.

What does this mean for equities?

We have written quite a bit in recent months about what rising interest rates may mean for fixed income and what we are doing to manage portfolios in light of our expectations, but what will higher rates mean for equities? Historically, equities have performed quite well during tightening cycles, with average returns through the duration of tightening of around 16%.

Clearly, every cycle is different and needs to be analyzed in the context of the current environment.  However, we believe the backdrop for equities is constructive based on the following:

• Reasonable valuations
• Low inflation
• Moderate economic growth
• Historically low interest rates that are not competitive with equity returns
• Moderate earnings growth
• GDP expansion
• High and expanding household net worth
• Negative investor sentiment (which has historically been a good indicator of future gains)

As always, please let us know if you have any questions or concerns about this report, or if we can provide assistance with any other financial matters including education, taxes, insurance, or estate needs.