The Federal Reserve Board kept the federal funds rate at its current level last week, thereby maintaining continued low borrowing costs for the time being. In its statement following the decision to hold rates steady, the Fed commented that although “the case for an increase in the federal funds rate has strengthened,” it decided “to wait for further evidence of continued progress toward its objectives” before raising rates.
In the wake of that decision, the “dot plot” used by the Fed’s decision makers to show their interest rate forecasts now suggests that there may be just one quarter-point interest rate hike in 2016. The market-implied probability of a rate hike in December currently stands at 57%. Another one or two rate increases are expected next year.
These are lower levels than were posted by the Fed governors back in June. One reason may be that the Fed continues to be confronted with mixed economic signals. For example, while the labor market looked strong last week (jobless claims last week fell to their lowest levels since July), the housing market stumbled (existing home sales in August fell for the second consecutive month).
Overseas, Japan’s central bank announced changes to its monetary policy last week. The Bank of Japan will now target 10-year interest rates and seek to alter the shape of the yield curve in an effort to fight deflation, boost lending and spark the Japanese economy. It also announced an expansion of quantitative easing until inflation is stable above 2%, and an addition of 2.7 trillion yen of exchange-traded funds that target the Tokyo Stock Price Index.
Looking ahead, members of the Organization of the Petroleum Exporting Countries (OPEC) and Russia will meet informally during the International Energy Forum in Algeria this week. Investors will be watching to see if OPEC members can come to an agreement on an oil production freeze that could strengthen oil prices.
GAIN: Active Asset Allocation
Global equities rallied after the Fed kept interest rates unchanged, with the S&P 500 and the Nasdaq Composite closing at or near their all-time highs. The U.S. dollar weakened following the Fed’s decision, helping emerging markets post strong returns as well.
In general, foreign stocks performed well last week and have kept pace with the U.S. market so far this year (foreign stocks have not outperformed domestic stocks since 2012). GAIN portfolios remain overweight in small-cap stocks and in emerging markets shares. In our view, stocks and other risk assets may continue to rise, especially in areas of the markets beyond domestic large-cap stocks.
Meanwhile, bonds also rallied on news that the Fed did not raise interest rates. Two sectors in which the GAIN fixed-income allocations are focused, corporate bonds and preferred stocks, performed well last week.
PROTECT: Risk Assist
Volatility levels fell after both the Federal Reserve Board and the Bank of Japan made monetary policy decisions and comments that appeared to reassure investors. The CBOE Volatility Index, or VIX, fell to 13 from 16 on Thursday alone.
Risk Assist portfolios have been unhedged for some time now, and were well positioned to take advantage of the global equity rally that occurred last week in the wake of those central banks’ decisions.
SPEND: Real Spend
The Real Spend portfolios’ benefited last week from an allocation to global equities, which rallied following the Fed’s announcement on interest rates. Real Spend’s exposure to growth stocks and dividend-paying investments also were beneficial.