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Coasting into year end

Brouwer & JanachowskiDecember 18, 2015

The Fed made its long awaited increase this week. We think it’s a mistake. The statement was muted and talked about “further improvements” here and there. The only improvement we have seen is in the labor market but, as we mentioned here and here, scratch the surface and it’s not a great picture. At the risk of flogging this to death, we would make two points:

  1. Industrial Production (IP): fell. It is rare that IP falls outside a recession and here's the chart. Nearly every dip below the line in a shaded area is a recession. Let’s hope this is different. The bulls say that’s because of the i) strong dollar (more later) and ii) warm weather, which affects utilities. Well, maybe.1
  2. The Fed’s revised down: its forecasts for 2016 through 2018. It’s odd they would raise with lower growth coming.

OK one more chart.  The talk is often about “normalizing” rates, which makes us kind of mad. Here’s a chart of the Federal Funds rate going back to the mid 1950s.


What on earth can they mean by normal? Anyway, we are done for now.

What did the markets do?

Most of the big markets, so the dollar, the S&P 500, the 10-Year Treasury and bonds barely moved. Foreign markets rallied but not enough to change the underlying concerns about growth and divergent monetary policy. The outlier was oil, which dropped 5%.

What to watch for now:

  1. Corporate bonds: especially High Yield. We saw one High Yield fund suspend redemptions as the market for the underlying securities dried up. Investments Grade bonds are highly correlated to High Yield. We fear a spillover.
  2. Treasuries: seem anchored in the 2.1% to 2.3% range. No reason to change as the yield curve tends to flatten when the Fed changes rates.
  3. Equities: flat but looking better into the Q4 2015 earnings season due in late January.

Bottom Line: Interest rate sensitive stocks like Schwab (SCHW), Federated (FII) and Bank of America (BAC) barely moved. We would have expected different. Big industrials, like Boeing, weakened. Look for European stocks to continue well into 2016. They are up 6% in 2015. But trading between now and year-end is all about closing 2015 positions.

--Christian Thwaites, Brouwer & Janachowski, LLC


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