Dear Clients,
Many of you are probably concerned by what has been happening to the markets over the last two days. Below are observations from our Chief Investment Officer, Mark Williams, which provide insight regarding recent market movements.
As an investor, we know you may have questions or concerns regarding recent volatility and its affect on you current portfolio. Please contact your investment officer at your convenience to discuss how these events might impact your investment strategy.
Good Morning,
I thought I would send you some thoughts on what is happening in the markets today. I will start with Fixed Income (bonds) and also touch on Equities (stocks). Much of today’s reactions are based on the comments of Fed Chairman Bernanke at yesterday’s news conference. While the markets are reacting forcefully today, I think it will moderate in the next few days.
Bonds
- Based on the testimony I heard, I would say that Chairman Bernanke was only modestly more hawkish than in his previous testimony. However, it appears the market viewed it as substantially so. He did not indicate rates would be increasing any time soon. He simply indicated the bond buying program might be “tapering” late this year and when it might end. Some market participants might think this is more aggressive than he previously articulated or it would be faster than expected. But, he also indicated this would be based on economic progress. The market is reacting as if he is removing the entire punch bowl today!
- He indicated that the 6.5% unemployment number was a point that would lead to further discussion. He also said that this number could be adjusted based on the “quality” of the improvement. Again, he is not giving a hard and fast number (the Fed never does), he is simply giving color to what might be future actions.
- He said the Fed has modestly increased its assessment of the current economy and continued to be unconcerned about inflation. This leads you to believe that rate increases are still in the future, but not soon.
- Finally, and most importantly, Chairman Bernanke made clear the Fed would remain accommodative for years. This is a message that is being drowned out by the rhetoric on the business news programs.
Stocks
- Markets are reacting to the Fed message as well. However, it is important to keep in mind, they remain up strongly for the year. Yes, we have just finished our worst two day sell-off this year, but we are coming off a great run.
- We have been saying for some time that a correction of 10-15% would not be out of the realm of possibility. While this is a possibility, for our clients wanting long-term exposure to this equity class, a buying opportunity could be in the offing.
- One of the reasons Chairman Bernanke is discussing tapering the Fed’s purchasing program is the economy is still registering slow, but steady growth. This is a good thing for the economy. It does mean some of the liquidity may be removed from the stock market, but that is a negative for traders, not long term investors.
- We are seeing more heavy selling in those sectors that tend to do well in a low-yield environment. During the past couple of sessions, telecoms and utilities have been a source of funds for investors.
- Stocks that investors perceive to be high-beta have had a more negative reaction than stocks that would be considered to be low-volatility. This indicates, to me, investors are taking some of their risk off the table.
Please let me know if you want to discuss, or if I can be of further assistance.
Best regards,
Mark
