EWM Team

In the statement after the FOMC meeting of December 17th, the Federal Reserve Bank (“Fed”) states that “it can be patient to normalize the stance of monetary policy,” a change from the statement of the previous meeting (October 29th) that “it likely will be appropriate to maintain the 0 to 0.25 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program.”  During the press conference following the statement, Ms. Yellen further clarified that patient means that the Fed is unlikely to start raising the federal funds rate for “at least the next couple of meetings.”

The swap of “considerable time” for “patient” is overall a neutral statement, neither more hawkish nor more dovish.  On one hand, by removing “considerable time,” it officially acknowledges that it may raise the federal funds rate in 2015 if warranted by data.  The combination of “patient” and “at least the next couple of meetings” essentially eliminates the early 2015 rate hike scenario.  Rate hikes following the January and March 2015 meetings are all but impossible, and April and June hikes are also extremely unlikely.  As arguably the most sophisticated central bank in the world, any rate hike during the first half of 2015 will be considered a rush job or a panic move that will surely endanger its credibility and disrupt global financial markets and the world economy.  The statement essentially narrows the window of the first rate hike to 2H/2015 from a wide range of early 2015 to 2016.  Following the statement, Treasury yields mostly little changed with the two-year yield, the closest proxy for the federal funds rate, rising to 0.619% from 0.554% on the previous day close.

This is not the first time for the Fed to transition from “considerable time” to “patient.”  In the 12/9/2003 FOMC meeting statement, near the end of that easing cycle, it stated that “the Committee believes that policy accommodation can be maintained for a considerable period.”  The next meeting though (1/28/2004), the statement became “the Committee believes that it can be patient in removing its policy accommodation.”  And on 6/30/2004, two meetings later, the federal funds rate was raised by 25 basis points (bps) to 1.25% from 1.00%.

In contrast to lowering rates, the Fed is indeed patient in raising rates.  Excluding the Volcker period, when Paul Volcker had to raise rates aggressively to battle runaway inflation during the 1970s and 1980s, it raised the fed funds rate almost always at the slowest, 25 bps pace.  For the aforementioned last tightening cycle, it raised the fed funds rate 16 more times, each at 25 bps, after the first hike.  It took two years, 17 consecutive 25 bps raises for the fed funds rate to rise from 1.00% to 5.25%.  The last 25+ bps raise took place on 5/16/2000, when the Fed raised the rate by 50 bps from 6.00% to 6.50%, but this was very much a “one and done” move as it was the last raise of that tightening cycle.

The Fed, however, is far more aggressive and impatient when lowering rates.  It took the Fed just a little over a year to cut the fed fund rate from 5.25% to 0 – 0.25%.  Starting with a 50 bps cut on 9/18/2007, it followed through with multiple 50 bps and 75 bps cuts before it cut the rate from 1.00% all the way down to 0 – 0.25% on 12/16/2008.

There is a change coming in industry classifications: S&P Dow Jones Indices and MSCI are moving real estate out of the financial sector and into its own sector. The change could have a wide-reaching effect. Among those potentially affected by the reclassification are many funds, portfolio allocation models and sector-rotation strategies.

A bit of background will explain why this change is noteworthy. S&P Dow Jones Indices and MSCI oversee the Global Industry Classification Standard, which is more commonly referred to as the GICS (pronounced “gicks”). It currently comprises 10 sectors, 24 industry groups, 67 industries and 156 sub-industries (excluding the forthcoming creation of the new real estate sector as well as the creation of a copper sub-industry). The GICS determines what sector or industry a particular publicly traded company is considered a part of. It underlies various funds, portfolio allocation models and likely sector-rotation strategies. It also used in various screening tools and trading systems.

It’s not the only industry classification system out there. FTSE (the “ICB”), Morningstar and Thomson Reuters, for instance, have their own proprietary classification systems.

The announced change, which will tentatively take effect after the market’s close on August 31, 2016, will only affect funds, models and strategies based on GICS. For example, the Financial Select Sector SPDR (XLF) will likely lose Simon Property Group (SPG) and American Tower Corp. (AMT). These REITs are currently the ETF’s 12th- and 18th-largest holdings. All historical performance for any fund or asset allocation strategy based on current GICS classification of real estate will need an asterisk placed by it since future returns will be different. All asset allocation and sector rotation models based on GICS will also be altered, potentially affecting how portfolios are allocated.

(Source: AAII)

The retail industry is a sector of the economy that involves individuals and companies engaged in the selling of goods and services to consumers. The outlook for retail sales in a given year has a great deal to do with the financial resources of the average U.S. citizen. Consumer spending accounts for roughly two-thirds of our annual gross domestic product (GDP).¹ Currently, in the U.S., we are experiencing cheaper fuel prices, rebounding stock prices and job gains on pace for their strongest year since 1999.² This, in turn, may provide consumers with more disposable income to spend on one of the great American pastimes, shopping.

» Total U.S. retail sales grew to $4.53 trillion in 2013 up 4.2% from 2012³, outpacing GDP growth of only 2.2%⁴. In addition, retail accounted for 27.0% of nominal U.S. GDP, up from 26.8% in 2012. That share has been on the rise consistently since a drop-off in 2009, when consumer confidence was at a low after the recession.⁵ Consumer confidence closed October 2014 at its highest level (94.48) since October 2007 (95.24), as measured by the Conference Board’s Consumer Confidence Index.

» The Bureau of Economic Analysis reported that wages and salaries, which tend to drive consumer spending, increased 5.1% in September 2014 from the year-earlier level.⁶

» Declining gasoline prices, as the U.S. is currently experiencing, tend to boost real consumer income more than most other price declines. Therefore, more money is available to spend on other things.⁷

» Online holiday sales in November and December 2014 are anticipated to increase by 13% to an all-time-best $89 billion. It is estimated that 3.4 million consumers will buy online for the first time this holiday season.⁸

¹UnitedStatesConect.com

²Bloomberg

^3,5eMarketer

⁴IMF

^6,7Barron’s

⁸MarketWatch

(Source: First Trust)

China surpassed Japan as the world’s second-largest stock market for the first time in three years amid growing investor confidence that policy makers in Beijing will revive the economy with monetary stimulus.

China’s market capitalization climbed to $4.48 trillion yesterday after a 33 percent increase this year, according to data compiled by Bloomberg. Japan’s slipped to $4.46 trillion and has dropped 3.2 percent since the end of December. China was briefly the second-biggest market, behind the U.S., in March 2011 after an earthquake in Japan sent shares tumbling in Tokyo.

While the weakening yen played a role in Japan’s shrinking market value in dollar terms, the Shanghai Composite Index (SHCOMP) has climbed three times as much as Tokyo’s Topix this year. China cut interest rates for the first time since 2012 last week and economists predict authorities will take more steps to support an economy headed for its slowest annual expansion since 1990. The Shanghai gauge still has a price-to-earnings ratio 21 percent lower than its Japanese counterpart.

The growth in China’s market value, helped by the resumption of initial public offerings in January after a more than yearlong freeze, marks a turnaround for an equity market that was among the world’s worst performers from late 2010 through the middle of last year. It comes as authorities give foreign investors unprecedented access to mainland shares through the Shanghai-Hong Kong exchange link.

China surpassed Japan as the world’s second-largest economy in 2010. Its gross domestic product was valued at $9.2 trillion last year, about 89 percent more than Japan’s, data compiled by Bloomberg show. China’s market capitalization data includes companies with a primary listing on mainland exchanges.

(Source: Bloomberg)