Stocks Push Higher as Fed’s Future Plans Become Clearer

Global equity markets continued their advance last week, as economic data generally remained supportive of stock prices and interest rates traded in a relatively tight range. Meanwhile, OPEC approved a plan to maintain its oil production cuts through March 2018 in a widely-anticipated move. Oil and energy stocks sold off on the news, but oil remains rangebound between $40-$60—a Goldilocks-like level the markets can easily deal with.

Minutes from the Federal Reserve Board’s latest meeting released last week indicated Board members’ likely plan for reducing the Fed’s balance sheet, which stands at around $4.5 trillion. Rather than sell those assets, the Fed will shrink the balance sheet by ending their policy of reinvesting the principal of securities as they mature. They are likely to end that reinvestment slowly and in stages, instead of all at once.

We agree with several of our outside research partners’ analysis that this methodology and pace will have little to no impact on the direction of interest rates over the next five years. This point is very important, as many proclamations of doom have been raised over the past several years about what will happen “when the Fed starts to sell its holdings.” Predictions have ranged from just a rise in interest rates to outright hyperinflation. Based on what is now known about the Fed’s plan to shrink its balance sheet, these scenarios appear to be highly unlikely.

GAIN: Active Asset Allocation

Stocks rebounded nicely last week. U.S. indices outpaced international equity markets as volatility fell, and growth stocks (which we currently favor in the portfolios) continued to outperform value stocks. The overall market trend remains positive. With new assets flowing into the markets, higher equity prices may be the norm.

In the fixed-income market, bonds were flat overall. Areas of the bond market that we favor—such as high-yield bonds, preferred stocks and other credit-sensitive securities—outperformed other bond market sectors such as Treasuries.

PROTECT: Risk Assist

Global equity market indices hit or approached new all-time highs last week, as did all the Risk Assist portfolios. Volatility (as measured by the CBOE Volatility Index, or VIX) fell back to levels that are among their lowest in decades, as investors were heartened by the Fed’s plan to shrink its balance sheet and by strong corporate earnings. The Risk Assist portfolios have not had any hedging in place since June 2016, which has contributed positively to performance.

SPEND: Real Spend

Equities outperformed fixed-income again last week, which contributed positively to the performance of the Real Spend portfolios. If interest rates move higher during the coming months, as many investors expect they will, income-producing strategies that place a greater emphasis on bonds could struggle relative to our equity-centric approach. We believe global stocks remain the best way to grow principal over the long term.

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Categories: Market Notes
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