Reduced GDP Estimates Might Keep the Fed on Hold

Equity markets posted their third straight week of gains, which hasn't happened since February of this year.  Factors supporting risk markets last week included a relatively encouraging beginning to third quarter earnings in U.S. and Europe as well as reduced expectations of a Fed rate hike this year.  FactSet reports that U.S. earnings are on track for -4.6%, whereas -5.1% was expected coming into earnings season.  Excluding the energy sector, earnings are projected to post modest single digit gains.  Two Fed Governors challenged Chairman Yellen's recent assertion that the Fed remains likely to hike rates this year.  Equity market rallies on a 'no Fed hike due to economic weakness' narrative seem to be losing steam recently in recognition of what weak economic fundamentals mean to the markets. 

Third quarter GDP estimates have been reduced by most forecasters to the 1%-1.5% range.  High profile economic reports on the week included anemic inflation (0% headline CPI) and soft retail sales reports mostly due to low energy prices and gasoline sales.  Treasury yields and credit spreads both fell slightly on the week.  Over a longer look back both high yield and investment grade credit spread have risen to 624 and 173 over comparable U.S. Treasuries, up from 450 and 135 earlier in the year.  Lower inflation expectations are reflected by 10yr and 5yr breakevens falling to 1.5% and 1.15% respectively.

Note: Returns are shown in percent and include income. The information is sourced from Bloomberg L.P. While this information is thought to be reliable, Taiber Kosmala & Associates, LLC does not guarantee its accuracy and assumes no responsibility or liability for its use.

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More Uncertainty About Rates

The Markets (as of market close September 25, 2015)

Like an early fall flu, investor anxiety continued to spread last week as uncertainty around the future of interest rates continued to drag down markets. Even a Friday rally in blue chips spurred by Federal Reserve Chair Janet Yellen's most recent comments couldn't cure the malaise. All indexes tracked here posted losses, with the Russell 2000 dropping nearly 3.5%.

Gold rose to $1,145.50, compared to $1,139.10 a week earlier, while crude oil ended the week at $45.34 a barrel. The national average regular gasoline price declined for the fifth week in a row to $2.327 per gallon on September 21, down $0.048 from the previous week and $1.285 lower than a year prior.

Market/Index2014 ClosePrior WeekAs of 9/25Weekly ChangeYTD Change
DJIA 17823.07 16384.58 16314.67 -0.43% -8.46%
Nasdaq 4736.05 4827.23 4686.50 -2.92% -1.05%
S&P 500 2058.90 1958.03 1931.34 -1.36% -6.20%
Russell 2000 1204.70 1163.35 1122.79 -3.49% -6.80%
Global Dow 2501.66 2326.45 2259.74 -2.87% -9.67%
Fed. Funds 0.25% 0.25% 0.25% 0% 0%
10-year Treasuries 2.17% 2.13% 2.17% 4 bps 0 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

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Fed Decides to Hold on Rates

The Markets (as of market close September 18, 2015)

Despite news that interest rates would not be increased in September, the stock market endured a significant sell-off by week's end, presumably in response to the Federal Reserve's report that the economy isn't strong enough to warrant an interest rate hike. Of the indexes listed here, the Nasdaq and Russell 2000 posted slight gains, while the large-cap Dow and S&P 500 regressed. Only the Nasdaq has posted positive returns year-to-date while the other listed indexes have all lost compared to the close of 2014.

The price of gold (COMEX) jumped a bit higher, selling at about $1,139.10 by late Friday afternoon compared to $1,107.90 a week earlier. Crude oil (WTI) prices remained relatively the same, selling at $44.98 per barrel by week's end. The national average retail regular gasoline price decreased to $2.375 per gallon on September 14, 2015, $0.062 under the previous week's price of $2.437 per gallon and $1.033 below a year ago.

Market/Index2014 ClosePrior WeekAs of 9/18Weekly ChangeYTD Change
DJIA 17823.07 16433.09 16384.58 -0.30% -8.07%
Nasdaq 4736.05 4822.34 4827.23 0.10% 1.93%
S&P 500 2058.90 1961.05 1958.03 -0.15% -4.90%
Russell 2000 1204.70 1157.79 1163.35 0.48% -3.43%
Global Dow 2501.66 2328.19 2326.45 -0.07% -7.00%
Fed. Funds 0.25% 0.25% 0.25% 0% 0%
10-year Treasuries 2.17% 2.19% 2.13% -6 bps -4 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

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Correlation and Your Portfolio's Performance


With the volatility in the markets over the last couple of months.  I thought it might be a good time to discuss correlations and how they affect your portfolio’s performance.  Different types of investments are subject to different types of risk. On days when you notice that stock prices have fallen, for example, it would not be unusual to see a rally in the bond market.

Asset allocation refers to how an investor's portfolio is divided among asset classes, which tend to perform differently under different market conditions. An appropriate mix of investments typically depends on the investor's age, risk tolerance, and financial goals.

The concept of correlation often plays a role in constructing a well-diversified portfolio that strikes a balance between risk and return.

Math that matters

In the financial world, correlation is a statistical measure of how two securities perform relative to each other. Securities that are positively correlated will have prices that tend to move in the same direction. Securities that are negatively correlated will have prices that move in the opposite direction.

A correlation coefficient, which is calculated using historical returns, measures the degree of correlation between two investments. A correlation of +1 represents a perfectly positive correlation, which means the investments always move together, in the same direction, and at a consistent scale. A correlation of -1 means they have a perfectly negative correlation and will always move opposite one another.

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