The Bear Growls

September 12, 2016

The S&P 500 closed out the week on a sour note as it fell 2.45% on Friday, mostly a result of hawkish comments by Fed officials. For the week, the DJIA fell 2.15% while the broader-based S&P 500 closed down 2.38%. International equities were mixed with the MSCI EAFE off slightly (-0.13%) for the week while the MSCI EM closed higher by 1.12%. Bonds closed the week in the red as yields backed up across the board on “Fed talk”. The 10Yr Treasury closed the week at a yield of 1.67%, 20 bps higher than the week before.

Eric Rosengren, the Boston Fed President and a voting member on the Fed’s interest rate setting board, said that low interest rates are increasing the chance of overheating the U S economy. Gradual tightening monetary policy is appropriate to maintaining full employment, he added. Fed officials will meet on Sept 20-21 to decide on interest rates, and the quiet period when the Fed will not speak begins tomorrow.

One of the tell-tale signs of a bullish stock market is sector rotation where money-flows move from one industry sector to another, but not out of the market itself. Last week money flowed out of stocks and into money market funds. The sectors most hit were the so called defensive stocks – utilities, telecoms, and consumer staples, which are a little disconcerting, and energy shares amid a decline in crude oil futures. We expect a bouncy ride until the Fed meeting and let reasonable asset allocations and global diversification carry the day.

“Better to keep quiet and only let people think you’re an idiot than to speak up and confirm it.” – Rodney Dangerfield