Commentaries
PMC Weekly Review - October 21, 2016
As we approach October’s end on the heels of an unseasonably warm fall, many of us are thinking about what lies ahead and the impact it will have on the markets. At the forefront, of course, are the US presidential election, the possibility of a Federal Reserve (Fed) rate hike as early as December, and what (if any) additional stimulus will come from the European Central Bank (ECB). And, just because I like euphemisms, and am in the Halloween spirit, as we prepare for what is sure to be an onslaught of very colorfully and elaborately dressed children on our front lawn in the next two weeks, I present my theme: Goldilocks and the three bears.
Envision the Fed as a sort of Goldilocks, navigating seemingly familiar, but in some ways unchartered and precarious, territory in the wake of a range-bound market, looming inflation, anemic domestic and international growth, and a very visible and public US presidential election cycle that has taken global center stage. No other presidential race in modern times has ever had the type of noise and divide we have experienced thus far in 2016. Debate viewership alone will convince anyone of this, with a record 84 million viewers tuning into the first presidential debate, and 66 million watching the final one on Wednesday night. Even the vice presidential debate drew 37 million viewers—37 million—staggering when one considers that up to a third of Americans cannot name the vice president in office at any given point in time.
Without getting into the nitty gritty of each of the presidential candidates’ proposed policies, suffice it to say that the implications for the stock market will look very different if Trump prevails versus a Clinton regime. A vote for Hillary in many ways will be a vote for the status quo, largely continuing her predecessor’s policies, albeit with some new initiatives, higher taxes, and increased regulation. In this scenario, investors are unlikely to perceive either a threat of, or potential for, significant change, and the market is likely to keep ho-humming along as it has been. In contrast, a vote for Trump will be for a new and much-less-predictable path, and at the very least, it is reasonable to conclude that the uncertainty may carry an increased risk of market volatility.
Across the pond, the ECB contends with the prospect of rising inflation and questions regarding the scope and duration of its quantitative easing. Many wonder how long it can possibly continue, and when the bank will begin to taper. Europe is fraught with many ongoing growth hurdles of its own. In the background, of course, are the struggles of large financial lenders, such as Deutsche Bank. Although Germany seems to have turned its back on the possibility of a bailout, many wonder whether the bank will pull through, as other similarly large and struggling financial institutions (particularly in Italy) watch closely. On Thursday, European equities finished higher after ECB President Draghi hinted of announcing plans in December for additional easing.
So, what is the Fed to do? Although the FOMC will meet in November, no policy changes are expected until at least the December meeting. Given a mixed bag of domestic economic data, a bevy of geopolitical concerns ranging from Brexit, to Russian tensions, and the Italian referendum, the committee must carefully consider the health of the US economy in its rate hike trajectory. Of note this week, initial jobless claims rose to a five-week high of 260,000, from 247,000 the week prior. The Philadelphia Fed Manufacturing Index decreased to 9.7 in October, from 12.8 in September, but remained well above market expectations of 5.3. And, existing home sales beat market expectations, rising 3.2% to 5,470,000 in September, from 5,300,000 the month prior. Corporate earnings season has begun, and despite some misses, several companies are beating expectations, and the dollar’s October rally continues to strengthen on the prospect of a rate increase. With an abundance of factors at play, one thing is certain – the committee has its work cut out for it! For our sake, let’s hope it gets it ‘just right.’
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2016 Envestnet. All rights reserved.