Capital Markets Update – Week of 3/9/2015

Market Overview


Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 3/9/15; Equity Market, Fixed Income and REIT returns from JP Morgan as of 3/6/15.


Happening Now


Friday’s Sell-Off Reminiscent of 2013

Last week, U.S. stocks suffered the second worst weekly loss of 2015 with the S&P 500 falling 1.58% over the 5 day period while the yield on 10 year treasuries increased 24 basis points, the second largest weekly increase this year. The U.S. stock market had been see-sawing throughout the week leading up to last Friday’s hotly anticipated jobs report as investors were looking for clues in the monthly release as to when the Fed’s first interest rate hike could occur. As was experienced in 2013 when investors anticipated the commencement of the tapering process, good economic news was bad news for the equity market. Friday’s report showed that 295,000 individuals found work in February and the U3 unemployment rate fell to 5.5% beating the consensus estimate of 5.6%.

As was expected, sectors of the market that are considered interest rate sensitive felt the brunt of the sell-off in Friday’s trading with Utilities and REITs down 3.0% and 3.2% respectively. We continue to believe that sell-offs such as this are overreactions by investors concerned about the timing of the first interest rate hike and overlooking the more important terminal level that rates will reach. We have long contended that the first increase in the Fed Funds rate will occur in the first half of 2015, however, we place more emphasis on where the rate will be at the end of 2015, our expectations are currently 0.75 – 1.00%.

Recent history offers insight as to how the market may react as news develops regarding the first rate hike announcement. Consider when the former Fed Chair, Ben Bernanke announced in May of 2013 that the tapering of bond purchases was on the horizon; the overall stock market reacted very similar to what we saw on Friday. For the week of May 20, 2013 the S&P 500 experienced a broad based sell off of 1.07% while Utilities lost 3.4% and REITs lost 4.4%. Since the end of May 2013, however, utilities and REITs have delivered a cumulative return of 16.2% and 14.1% respectively. We believe this reflects the fact that despite the potential for the Fed Funds rate increasing sooner than some may expect, yields will remain low over the short to intermediate term. The demand for U.S. fixed income securities should stay elevated due to the attractiveness of current yields relative to other developed countries (Spanish 10 year government bonds currently yield 88bps less than U.S. Treasuries!) in addition to the strength of the U.S. Dollar. Investors looking to earn income from their investments will likely still consider the 3.3% and 3.5% yields offered by utilities and REITs (as measured by the ETFs, XLU and VNQ) attractive and their prices should recover.

Return and rate data above from Wells Fargo as of 3/9/15.


Important Information and Disclaimers

Past Performance is not a guarantee of future performance.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.

The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.


MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.

Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]:  The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

Investors cannot directly purchase any index.

LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S.  stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.