waterfallThe Markets

Financial markets were remarkably calm last week, finally seeming to come to terms with rising rates.

Many stock markets in the United States, Europe, and Asia moved higher as investors chose to focus their attention on the minutes of the October 27-28, 2015 Federal Open Market Committee (FOMC) meeting, which were released on Wednesday, rather than recent terrorist attacks in Paris, Lebanon, Mali, and against Russia.

The FOMC minutes captured attention because they suggested even if the Federal Reserve does begin to tighten monetary policy in December, rate increases may be incremental and the target rate may not be as high as many imagined. Bloomberg reported:

“Fed officials received a staff briefing on the equilibrium real interest rate, or the policy rate that would keep the economy running at full employment with stable prices, according to the minutes. Fed officials discussed the possibility that the short-run equilibrium rate “would likely remain below levels that were normal during previous business cycle expansions,” the minutes said.”

Former Federal Reserve Chairman Ben Bernanke has written about the equilibrium real interest rate on his blog. The point he makes is the equilibrium rate – not the Fed – determines interest rates. The Fed uses its influence to move interest rates toward levels that are consistent with its estimate of the equilibrium rate. If the Fed pushes for rates that are too high, the economy may slow. If it pushes for rates that are too low, the economy may overheat. Not everyone agrees on this point, and that has led to debate between Mr. Bernanke and Former Treasury Secretary Lawrence Summers.

While the Fed is expected to begin tightening U.S. monetary policy, the European Central Bank (ECB) is expected to further loosen monetary policy in December. The Wall Street Journal reported the ECB is “prepared to deploy its full range of stimulus measures to fight low inflation…” The news was welcome. CNBC reported European markets closed the week at three-month highs.


Data as of 11/20/15

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

3.3%

1.5%

1.8%

14.6%

11.8%

5.2%

Dow Jones Global ex-U.S.

2.5

-3.9

-6.4

3.1

0.2

1.5

10-year Treasury Note (Yield Only)

2.3

NA

2.3

1.7

2.8

4.5

Gold (per ounce)

0.0

-9.8

-9.1

-14.5

-4.4

8.3

Bloomberg Commodity Index

-1.2

-22.0

-31.0

-17.1

-10.9

-6.8

DJ Equity All REIT Total Return Index

3.8

1.3

5.2

11.8

12.4

7.3

S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

*The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.  You cannot invest directly in this index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* “Markets Come To Terms With Rising Rates”

Sources:

http://online.barrons.com/mdc/public/page/2_3064-466583.html (Click on “U.S. & Intl Recaps,” “Fed funds rate increase – on the horizon,” then scroll down to the chart)

http://www.federalreserve.gov/newsevents/press/monetary/20151118a.htm

http://www.bloomberg.com/news/articles/2015-11-18/fed-inserted-language-to-stress-potential-for-december-liftoff

http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30-why-interest-rates-so-low

http://www.brookings.edu/blogs/ben-bernanke/posts/2015/04/01-larry-summers-response

http://www.wsj.com/articles/draghi-vows-to-use-all-instruments-if-price-stability-goal-at-risk-1448009389

http://www.cnbc.com/2015/11/20/european-markets-set-for-downbeat-tone-as-commodities-battered.html

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