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Market Recap – Global Equity Market Declines

Market Digest – Week Ending 9/9/16

Friday’s 2.4% decline in the global equity market felt like a bowling ball dropped into a calm lake. It had been two months since the market last moved more than 1% on a given day. It is unclear exactly what triggered the sell-off, but fears focused on a reduction in central bank support for the market rally. Fed Bank of Boston President Eric Rosengren, who has previously supported low rates, made hawkish comments, leading many to believe a September rate hike is in the works. Also, DoubleLine CIO Jeff Gundlach said it is time to expect higher rates, though he has been saying that for some time. Stocks, bonds and real estate fell for the week while the dollar and commodities were relatively flat.

Weekly Returns:

S&P 500: 2,128 (-2.1%)
FTSE All-World ex-US: (-1.4%)
US 10 Year Treasury Yield: 1.67% (+0.07%)
Gold: $1,327 (+0.2%)
USD/EUR: $1.123 (+0.6%)

Major Events:

• Tuesday – The ISM non-manufacturing survey came in at 51.4, lower than expected.
• Wednesday – Dell closed its $60 billion merger with EMC.
• Wednesday – Apple announced its new iPhone7, but consumers were initially underwhelmed with the new features.
• Thursday – Wells Fargo agreed to pay a $185 million fine and admitted to opening millions of accounts without customer knowledge.
• Thursday – Macy’s announced it would close 15% of its stores but reported results which exceeded expectations.
• Friday – Global equity markets fell over 2% on fears that central banks will become less accommodative sooner.
• Friday – German 10 Year Bunds rose above 0% yield for the first time since July.
• Friday – North Korea tested its 5th nuclear bomb and said it could now attach nuclear warheads to missiles.

Our take:

The eerie market calm since Brexit was bound to end and it did on Friday with a 2.5% decline in the S&P 500. One day does not make a trend, and the pattern in recent years has been for quick sell-offs to bounce back quickly. There is a good chance this one will also, though it does seem we are getting closer to the Fed raising rates meaningfully (but really this time). To us, this means a series of increases over a period of time (probably a year or two) which bring short rates to around 1.5%.

Central banks in the rest of the world were slower to be as aggressive as the Fed, and will be slower to take the pedal off the gas as well. The first half of the current bull market was driven by a snap-back from the last bear market. The second half has been driven by central banks. Presumably, when central bank support is removed, stocks will fall. How much and for how long is unknown. So is the timing. There is no black and white line for what makes a central bank supportive or unsupportive.

An old market adage is don’t fight the Fed (or the ECB, BOJ, or BOE), and it is good advice. The problem is, it isn’t so clear when you are and when you are not. The reason to be scared of stocks is also the reason to be scared not to be invested – central banks have more power to fuel expansions longer than crazy equity valuation money or loose mortgage lending or anything else we can think of which has driven previous bull markets. This one may die hard. But taking a step back, the longer term trend is still up and until that changes, it is probably premature to even think about the next bear.

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