From our CIO | Market Update 6.15.17
published: June, 15th 2017
Market Update – June 15, 2017
We are seeing a little bit of volatility today, which is the first we’ve seen in a little while. The following are a couple of quick bullet points:
- Markets are broadly selling off as yesterday’s decision indicates the Fed is going to be more focused on unemployment than inflation as the signal to hike. We’ve seen a recent soft spot in the inflation numbers, while employment continues to be strong, and yesterday’s commentary was somewhat dismissive of the soft-patch. For those in the market that are more inflation focused as a measure of economic growth, this means that the Fed may raise rates when it doesn’t have to, or perhaps more importantly, when it shouldn’t – if they put the brakes on before inflation is really present, the economy will slow needlessly.
- The bond market, meanwhile, is sending the signal that economic growth may not be in the 2.5-3% range, as yields on the 10 year continue to hang out around 2.15%. As we commented on early this week, a normalization of the fed balance sheet could put pressure on the longer end of the curve, and the fed may attempt to steepen the yield curve in any event in an effort to help out financials and other sectors that are sensitive to the spread between long and short rates. The yield curve has flattened by about 45bps* since March (2’s vs. 10’s), and I would remind folks that a flat yield curve is historically an indicator of slowing economic growth.
- From a portfolio management standpoint, a “fed driven market” represents a challenge, since it puts pressure on both stocks and investment grade simultaneously. This is similar (in very small scale) to the taper tantrums from earlier this cycle, in which there isn’t really a good hedge to hide out in. I would note that historically these taper tantrums have proved that the Fed will not sink the market with a rate hike, however there’s a chicken / egg problem here – the market usually panics before the Fed says they aren’t comfortable raising.
- From a sector standpoint, the market weakness is hammering tech, and oil continues to underperform. The weakness in tech is largely consolidation of earlier gains, while the oil weakness is part of a continuing narrative around the inability of OPEC to reign in the market.
Rick Wedell is neither affiliated with nor endorsed by LPL Financial.
*Basis points. One basis point is equal to 1/100th of 1%, or 0.01%
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