Market Commentary, 09/27/16
The Dow and S&P 500 fell substantially on Friday and Monday (09/23/16 and 09/26/16), reflecting worries over which regulations and economic policies the two candidates might push at yesterday’s Presidential Debate. Today the market moved a slightly higher in what is being called a relief rally following the Trump-Clinton Debate but for months now, market gains have been choppy and the expectation is that the stock market will remain directionless until a President has been elected.
At the start of 2016, there was good reason to think rates would rise this year. The Fed had just hiked its short-term rate from near 0 to 0.25%. That shift in monetary policy should have triggered more rate hikes and a gradual return to more normal interest rates. Instead, the Fed has spent the year fretting over conflicting economic data and, once again on Wednesday, refused to budge any further on rates.
Many prominent fund managers think the early 2016 logic still holds and a stock market reckoning is coming. Investors, including George Soros, Carl Icahn, David Tepper, and Jeffrey Gundlach, appear to have bet against the US stock market, or are at least urging caution. In general, their thinking – much like ours – is that rates will rise sooner or later, which will crack the artificial floor that has been propping up stocks for nearly a decade of super-easy monetary policy.
The Fed is one of the most second guessed agencies in government, and Chairperson Janet Yellen is often called in front of Congress to explain its actions. This scrutiny has increased in recent weeks as there are several, including Donald Trump, that have questioned the bipartisanship of the Fed. Peter Conti-Brown, Wharton legal studies professor and author of The Power and Independence of the Federal Reserve, not only agrees, but argues that politics have always been a key feature of the Fed.
Given this relationship, it is likely that the low interest rate environment will continue if Hillary is elected. While this action, or lack thereof, will result in short-term market growth, this artificial rate environment would likely contribute to the already developing market bubble.
On the other hand, we would expect interest rates to increase more quickly if Trump is elected. While this would likely have a negative impact on the stock market in the short term, a market washout may be beneficial in the long term in that it would remove the artificial dynamics that have been supporting the market since the Fed started printing money in late 2008.
Given the continued overall volatility, we are maintaining our current conservative approach. As we mentioned last week, the analysts want economic data that is good, but not so positive that the Fed increases interest rates, creating a “Goldilocks” effect. So we will continue to monitor the market and key economic events and use that data to invest accordingly.
Wayne Copelin, CFP®
President, Copelin Financial Advisors, Inc.
514 Brooks Street
Sugar Land, TX 77478
Phone (281) 240-2902
Fax: (281) 240-2856
Securities offered through ProEquities, Inc., a Registered Broker-Dealer and Member FINRA & SIPC Advisory Services offered through Harvest Investment Services, LLC., a Registered Investment Advisor Copelin Financial Advisors, Inc and Harvest Investment Services, LLC are independent of ProEquities, Inc.