Q3 2015 Market and Economic Update

The markets continue to wait on the Fed rate lift-off
Jeffrey Kravetz

Heading into the fourth quarter, Arizona is showing continued, though measured, positive momentum. According to Arizona’s Economy, a publication of the Economic and Business Research Center (EBRC) at the University of Arizona, as of August, total nonfarm employment in Arizona was up 2.03 percent and hourly wages had improved 2.72 percent year over year. In addition, the S&P/Case Shiller AZ-Phoenix Home Price Index continued to show improvement; as of July, it was up 10 percent year over year. That said, Arizona-based investors continue to be mindful of the volatility that has defined the market for the last few months.

Economic Trends

In our view, global economic turmoil, a delayed Federal Reserve (Fed) rate lift-off date, political wrangling, Middle East tensions and overly optimistic revenue and earnings expectations for 2016 are among items causing investor angst and concern while serving as the basis for a cautious bias.

However, there are some positive economic trends. Income data for August indicated that consumers began to spend their rising incomes and dip into savings. Consumers may now be spending some of the windfall from lower energy prices, which could provide support to the U.S. economy through the last half of the year.

Equity Markets

Whether current market uncertainty and lackluster returns merely reflect a soft patch in the ongoing bull market or the start of a bear trend will likely depend on the future pace of global growth and company earnings. Earnings will likely be a swing factor in the coming weeks. Expectations for third-quarter results are low, setting the stage for better-than-expected results to pave the way for higher stock prices.

On balance, we remain positive about the long-term outlook for equities, based on macro and fundamental backdrops that seem supportive of equity prices and given that the classic signs of a frothy market are not evident. We continue to believe that lackluster year-to-date performance affords investors with tax-loss selling, portfolio upgrade and dollar-cost average opportunities, particularly for investors with time horizons of six to 18 months or longer.

Fixed Income Markets

The Fed’s decision not to raise interest rates following the Federal Open Market Committee (FOMC) meeting on September 17 effectively prolonged lift-off uncertainty while introducing new concerns and reasons for investors to maintain a cautious near-term bias. The initial rate hike has marquee appeal, given that the Fed has not raised rates in nearly 10 years, since June 2006. As such, not raising rates preserves an element of uncertainty, a possible negative for future sentiment and volatility.

We anticipate renewed dollar strength over the next two to three months and therefore maintain a cautious view of foreign-denominated developed market international debt. We certainly see the Fed’s current accommodative stance as a headwind to dollar appreciation over the near term. However, we expect divergent monetary policy and growth outlooks to support U.S. dollar strength and hinder the returns of developed market bonds over the next six to nine months.

Real Estate Markets

After three months of steady increases and post-recession highs, existing homes retreated in August, as did pending sales activity, nationwide. However, new home sales improved and are up 20 percent over last year. Reports also indicate first-time homebuyers of existing homes moved up to 32 percent, but new home sales of less than $200,000 increased year over year, which is an indication of entry-level buying.

U.S commercial real estate continues to improve, with leasing activity advancing over last year. Vacancies are trending downward and there is limited supply in some markets. We believe tech markets and e-commerce should continue to drive transactions in the office and industrial segments, respectively.

Commodity Markets

The Fed decision continues to weigh on the commodities markets. A Fed hike and solid U.S. growth paired with a stronger U.S. dollar will likely leave gold under pressure into year-end. In the meantime, Fed uncertainty could lead to additional volatility, including temporary price gains.

The oil market remains well supplied and signs of production cuts are not meaningful. Prices are likely to drift lower into year-end. Meanwhile softer growth in China and weaker manufacturing indicators are impacting metal prices. We believe prices are likely to drift lower in the face of these stresses, until growth in China stabilizes.

Jeffrey Kravetz is Regional Investment Director for The Private Client Reserve of U.S. Bank in Phoenix.

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This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. The organizations mentioned in this publication are not affiliates or associated with U.S. Bank in any way.

Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment.

The S&P/Case Shiller Home Price Index is a group of indexes that track changes in home prices throughout the United States. In addition to a national index, they also produce indexes for certain metropolitan statistical areas. 

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer term debt securities. Investments in lower rated and non-rated securities present a greater risk of loss to principal and interest than higher rated securities. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes, and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties (such as rental defaults).

 

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