Investment Insights: Yellen hikes up her sleeves?

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Road with a few cars traveling into a beautiful landscape with Grand Tetons in the background (near Jackson Hole, WY)We are getting down to the wire on whether the Fed will follow through on their indications that an increase, or even two, in the federal funds rate could happen in 2016. Federal Reserve Chair Janet Yellen is meeting with global monetary policy makers in Jackson Hole, Wyoming, this week to discuss global growth concerns and what policy moves will be necessary in the months ahead. They have their work cut out for them. Minutes from the Fed meeting last week show most policymakers have agreed inflation remains persistently low – and well below their target, which is in stark contrast to the improving employment picture. Even with an intensifying hawkish view from the Fed, fed futures data has reflected growing probabilities for a rate hike this year, especially in December, according to Bloomberg.

Markets are also closely monitoring communications from the European Central Bank, which has been on alert since Brexit. The central bank has monitored economic data from the United Kingdom along with weaker areas of the European periphery. Investors are expecting an expansion to their stimulus program which may include a higher amount of asset purchases, a time-extension to the program, and additional cuts to key interest rates.

Stocks in emerging markets, regions more sensitive to interest rates changes, declined over the last few days as the prospects of a rate hike from the Federal Reserve grew. Commodities have fallen over the last few days but drove higher as the U.S. dollar fluctuated on rate news. Oil has rallied to just under $50 per barrel but hit a hiccup when Iraq announced it would ramp up oil exports; storm season in the U.S. may have an impact on domestic production. Developed market equities also dragged lower on mixed data from Europe and bets on Fed moves.

The key events we will be looking for in the remaining months of 2016 will revolve around central bank actions, improvement in overall economic observations and stabilized data in Europe, along with additional currency devaluations from China. Our allocations remain modestly defensive in underlying equity and bond strategies. Additionally, our strategies have increased alternative asset class exposure to further diversify our portfolios and expand allocations to absolute return strategies.

Chart showing weekly update in equities and other market data

Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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