OCEAN CITY — With the Fed not hiking interest rates last week, we think it will remain patient and adopt a long and slow hiking cycle in response to an improving economy and therefore investors should focus more on the pace of interest rate hikes than on the date of the first hike.
Nevertheless, market volatility will be with us for a while and diversification with a focus on high quality is equally important for bonds and stocks.
The Fed’s monetary policy objectives are maximum employment and stable prices — often referred to as the dual mandate. The Fed would like to see continued improvement in the labor market and inflation of 2% before it embarks on an interest rate hiking cycle. However, inflation is lower than expected and recently increased market volatility has introduced uncertainty about the timing of the first Fed hike. According to BofAML Global Research, three scenarios seem plausible for the Fed: the base case is that markets stabilize and the Fed hikes this month; the second most likely scenario is that the Fed remains uncomfortable with market uncertainties and delays hiking until October or December; and the least likely scenario is that shocks to the economy worsen, damaging growth and turning a temporary delay into a semipermanent delay.
The Fed has to take all this into consideration when deciding whether to hike. We think the Fed will remain patient and adopt a long and slow hiking cycle in response to an improving economy. Interestingly, the market has already priced in an extremely gradual hiking cycle this time around, compared to staircase-like cycles in the past.
Economic policy uncertainty has been relatively low recently, but looks likely to increase over the next couple of months. Policy uncertainty last spiked around the federal government shutdown and debt limit debate in October 2013, and has been fairly subdued since then. With another series of deadlines approaching, including the end of the federal fiscal year and another debt limit deadline, headlines out of Washington are likely to lead to an uptick in uncertainty, at least temporarily.
Lawmakers face four important deadlines over the next few months: 1. Congressional consideration of the Iran nuclear agreement.
- Fiscal year-end (Sept. 30): There is a greater risk of a federal government shutdown from Oct. 1 than there has been at any point since the last government shutdown occurred two years ago. However, it is the view of BofAML Global Research that, going into an election year, incentives are strong to avoid “fiscal cliffs” that create uncertainty and undermine confidence.
- Transportation infrastructure funding expires (Oct. 29): After a series of short-term extensions, many in Congress hope to pass a long-term (five- to six-year) reauthorization of the federal highway program, but lawmakers have not been able to agree on how to offset the cost of doing so.
- The debt limit will probably need to be raised in November: The U.S. Treasury has indicated that the extraordinary measures employed to preserve the nation’s borrowing capacity are not likely to be exhausted before late October and will last for at least a brief additional period of time. According to Strategas, an independent research firm, the debt ceiling will need to be raised sometime between mid-November and early December.
(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)
OCEAN CITY — The following five common investing myths, when put into full context, can prove key reminders as investors seek to achieve their financial goals. Myth #1: “I should wait for a pullback in markets before I get invested.” Reality: Investors need to stay invested in order to achieve their long-term financial goals. Market timing is often a losing … Continue reading
OCEAN CITY — Last month we saw one of the most volatile weeks in recent history. The S&P 500 plunged by 5% on Monday, extending its decline to nearly 12.5% from its May high, while volatility as measured by the VIX Index1 spiked to 41, reaching an intraday high of 53. However, stocks rebounded later in the week on dovish … Continue reading
OCEAN CITY — The current stock market selloff has spurred flashbacks for previous financial crises, with the S&P 500 down roughly 11% from its May peak. These concerns have been stoked by slowing growth in China, a steep decline in commodity prices, a strengthening U.S. dollar and a potential rate hike by the Federal Reserve (Fed). While investor uncertainty remains … Continue reading
OCEAN CITY — The low-yield environment we’ve been in for the past five years has forced investors to rethink their approach to investment income. We think bond yields will likely remain range-bound in the near term, as global disinflationary forces weigh on interest rates. We advocate a diversified approach to generating income to cope with low rates and rising risks. … Continue reading
OCEAN CITY — U.S. equities have exhibited a wide divergence across style and size this year, and the dispersion in performance is likely to persist. In this low-growth macroeconomic environment, we expect growth stocks to continue to outperform value stocks. However, investors should avoid pockets of the market where valuations have been bid up to unsustainable levels. On the other … Continue reading
OCEAN CITY — Amid growing concerns over Greece, Puerto Rico and China, signs of economic improvement in the U.S. continue to sprout – notably in the housing sector. Recent data suggests the sector’s growth is likely to improve steadily in the near term. What’s important is that strength in the housing sector has historically had positive knock-on effects for consumer … Continue reading
OCEAN CITY — News headlines relating to the municipal market — particularly in connection to Puerto Rico’s tumult and the Illinois state budget — continue to be overwhelmingly negative. Puerto Rico faces the prospect of defaulting on its $72 billion debt. Prices for its general obligation bonds, as well as for the bonds of a number of the island’s agencies, … Continue reading
OCEAN CITY — Bond yields continued to rise, with the 10-year U.S. Treasury yield jumping as high as 2.5% in June before pulling back. As bond yields have risen, prices have fallen, with outflows accelerating and bond market volatility creeping higher. These developments have rekindled investor concerns over bond market volatility and liquidity. We expect bond market volatility to rise … Continue reading
OCEAN CITY — Bond yields have risen swiftly this month, with the 10-year U.S. Treasury having neared 2.5% from 2.12% at the end of May. The speed and magnitude of this move have caught most investors by surprise, just as they had become accustomed to the steady decline in yields over the past two years. The current bond market selloff … Continue reading