PulsePoints > October Investment and Market Update
The Gill Capital Partners Investment Committee meets weekly to review asset allocations, macro-economic events and manager performance. Below are a few topical items and the Committee’s view on them.
Equity Market Volatility
The capital market volatility that began in August continued toward the end of September after a brief rebound. Most U.S. equity indices have pulled back around 10% from the peaks earlier this year. As we discussed last month, the market had gone nearly 4 years without a 10% correction, something that has historically occurred every year and a half. The most recent volatility was initiated by the Federal Reserve meeting in September (see below for more on this), and has been further aggravated by the continued pressure on commodity prices, concerns over international economic growth, and worries about the high yield bond market.
Our view: The Committee’s view remains unchanged, in that this volatility represents a long overdue correction. We are not anticipating substantially more downside from here. We do, however, expect the increased volatility to continue as the market digests the reality of higher rates here in the U.S, lower commodity prices, and slower growth from China. We continue to see quantifiable economic strength here in the U.S., which we believe is poised to continue (see below for more on this). Clarity from the Federal Reserve, coupled with economic growth, high corporate profits in developed markets, very negative investor sentiment readings, and what are now very reasonable equity market valuations, should act to support equity markets as we move into the fourth quarter.
U.S. Economic Data
- The latest U.S. numbers stand in stark contrast to much of the rest of the world, where growth has dampened. For example:
- GDP was revised sharply higher for the second quarter, though annual growth remains slow and steady.
- Jobless claims have held near 15-year lows through August.
- The housing market is by some measures back to pre-season levels.
- Consumer confidence in September rose to its highest level since the start of the year.
- Consumer demand is running at a healthy pace, driven by job and income growth.
- Corporate profits are at all-time highs and corporate balance sheets (aside from the energy sector) are very healthy.
- Household purchases are expected to continue at a robust pace as gas prices remain low, hiring picks up, and home prices continue to rise.
Our view: As we have said before, we believe the U.S. economic fundamentals have been steadily strengthening in a relatively quiet and quantifiable manner over the past few quarters. Low commodity prices are keeping inflation levels in check and continue to benefit consumers. We see this fairly boring, but healthy growth story continuing in the U.S. amidst the more uncertain international backdrop.
The Federal Reserve, Interest Rates & Bond Portfolios
The Federal Reserve decided to leave interest rate unchanged at the much-anticipated September meeting, citing concern over the international economic environment. The market very much disliked this message and the lack of clarity that was provided.
Our view: As mentioned previously, we believe that the Federal Reserve will raise interest rates later this year, despite a slightly weaker than anticipated jobs report last week. Their apparent hesitation around doing so thus far has created volatility and uncertainty. Short-term interest rates have already priced in the initial rate hike. This is evident in the increase in 2-year Treasury bond yields. We expect, as do many, that the Federal Reserve will take a slow and measured approach to raising rates. If this is the case, we anticipate a flattening yield curve, with short-term rates rising more than long-term rates, and the entirety of the curve rising very slowly, if at all, over the next twelve months. Our yield curve expectations, along with our interest rate expectations, inform our very thoughtful and targeted approach to our fixed income portfolios.
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