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The Federal Reserve Resists Change

[By staff reporters]

DJIA: 16,330.47  -179.72  -1.09%

What to watch

The Federal Reserve [FOMC] announced last week that it will leave the federal funds rate unchanged. Unease concerning the domestic implications of international weakness, particularly with regard to inflation, contributed to the Fed’s decision to delay changing its policy right now.

Why it’s important

The Fed’s decision to stay put indicates that policymakers are not as “reasonably confident” that inflation is heading towards their target of 2% as they’d like to be.

For example, Core Inflation [CI], one key economic measure the Fed is watching, is heading into a third year of running below the Fed’s long-run 2% target rate. While the labor market portion of the Fed’s dual mandate appears in good shape, in part indicated by an unemployment rate within their estimate of full employment, policymakers decided to postpone a decision to raise their policy rate for the first time in nearly a decade, citing concerns around the impact that global economic and financial developments could have on domestic conditions.

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Assessment

According to the Vanguard Group, despite the attention given to the timing of when the Fed starts raising rate, some believe the more important questions are how quickly rates will go up and where they stop. Whether liftoff happens in the coming months or even next year, we expect the Fed to make more measured, staggered rate increases than in previous tightening cycles, especially given the fragility in global economic growth.

This “dovish tightening” will gradually normalize policy in a global environment not yet ready for a positive real fed funds rate.

Conclusion

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Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

Front Matter with Foreword by Jason Dyken MD MBA

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12 Responses

  1. Oh, the economic and market uncertainty!

    ▼ Dow 16,001.89

    Investors are keeping one eye on the Federal Reserve and the other on politicians trying to determine what may happen during the last quarter of the year.

    The Fed, which is the central bank of the United States, is responsible for conducting monetary policy with an eye toward full employment and stable prices. If, as St. Louis Fed President James Bullard told Reuters, the economy is near full employment and inflation is sure to rise, then why didn’t the Fed raise rates in September?

    Reuters reported voting members of the Federal Open Market Committee (FOMC) decided uncertainty in global markets had the potential to negatively affect domestic economic strength. Mr. Bullard believes the decision puts an October increase in doubt, too, according to Nasdaq.com.Mr. Bullard told reporters:

    “For the committee, it’s always hard to have made a big decision at one meeting and come back at the next meeting. The key question will be what kind of data did you get during the intervening period that changed your mind, and it’s not that clear what data we will have in hand in October that we would be able to cite to support my position, relative to what we had at the September meeting. But it is possible.”

    Regardless, Chairwoman Janet Yellen made it clear last week she expects to see a rate hike before year-end. That might have helped settle markets, except Speaker of the House John Boehner resigned soon after Yellen spoke. The Speaker’s resignation made a government shutdown this week less likely, according to Barron’s. However, fiscal policy issues haven’t been resolved. A meeting of the political minds this week would set the stage for a mid-December showdown and that’s data the Fed will have to consider if the December FOMC meeting occurs amidst a government shutdown and debt-ceiling crisis.

    No one seemed to be happy with the state of affairs this week, and stock markets were awash in red ink.

    Arthur Chalekian GEPC
    [Financial Consultant]

    Like

  2. What the Terrible September Jobs Report Means for the Economy

    A fresh piece of evidence, along with August’s wild market swings, pointing to an underlying economic fragility.

    http://www.nytimes.com/2015/10/03/upshot/what-the-terrible-september-jobs-report-means-for-the-economy.html?em_pos=small&emc=edit_up_20151002&nl=upshot&nlid=71936802&ref=headline

    Milton

    Like

  3. It’s all about China?

    China’s economic growth has been slowing, and it may end up below the government’s 2015 growth target of 7%. There have been headline-grabbing movements in the stock market since the summer, partly on fears that a hard landing might be in the cards. So, the housing market may be key to China’s economic situation.

    Housing, a much larger component of Chinese household wealth than stock investments, has been a major driver of China’s growth for years. Housing investment increased at an average rate of 25% per year from 2003 to 2013, and it currently represents about 10% of China’s GDP.

    In comparison, U.S. housing construction represented only 6% of GDP when it peaked in 2006. And, by some calculations, China’s housing market accounts for nearly a quarter of the world’s production of aluminum, steel, and zinc.

    Curtailed investment in this sector is to be expected as Chinese policymakers attempt to steer the country toward a more services-oriented, consumer-driven economy. But, doing so without an offsetting pickup in other areas of the economy could result in a hard landing (in this case, growth below 4%) or even a recession. Also, less construction activity will hurt the prices of certain commodities and the countries that supply them.

    For example, Vanguard sees the probability of a housing-market crash such as the recent one in the U.S. as unlikely, in part because the Chinese property market is much less leveraged than markets of many developed countries, and because the government is willing and able to intervene. That said, a continued slowdown in housing investment will weigh on overall growth in China and could well generate more bouts of volatility in the markets. Neighboring countries and commodity exporters are likely to feel a direct impact as well, while Europe and the United States should be less affected.

    Nolan

    Like

  4. Healthcare Workforce Economics

    Healthcare organizations added 34,000 jobs in September, representing a small drop compared to the 41,000 jobs added in August, the US Bureau of Labor Statistics reported.

    Dr. David E. Marcinko MBA

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  5. IT’S IMPORTANT TO ASK THE RIGHT QUESTIONS

    A recent article in The Economist examined the “gig” economy. You know, people selling crafts online, offering their services as taxi drivers, renting their cars and spare bedrooms for short periods. Some folks even rent space on their driveways to commuters. It’s that old American ingenuity and, as it turns out, it’s difficult to quantify.

    Analysts expected this employment revolution to be reflected in self-employment statistics. However, the self-employment rate in the United States has declined during the past two decades, according to Pew Research.

    Why would self-employment be falling when more people appear to be offering services independently? The Wall Street Journal suggested several possibilities: 1) The gig model might not be prevalent even though some headline-grabbing companies rely on it; 2) It’s possible gig companies operate in industries that have always depended on independent contractors; or 3) people who do this work may report they are employees of the firms they work for rather than independent contractors.

    The Economist concurred with the last, suggesting that people do not consider their gigs to be work. If that’s the case, then governments may not be asking the right questions when they try to assess the situation. A British survey that focused its queries on alternative employment found that about 6 percent of respondents participated in the gig economy.

    Does it matter? Should anyone be concerned the dimensions of this segment of the economy are relatively unknown? The Economist suggests it is important:

    “Measuring the gig economy matters. To get a clear picture on living standards, you need to understand how people combine jobs, work, and other activities to create income. And, this gets to the crucial question of whether the gig economy represents a positive or negative development for workers. All this makes it important for official agencies to have a go at measuring it.”

    What’s the solution? The Wall Street Journal suggested the U.S. Congress might want to reconsider funding the U.S. survey of Contingent and Alternative Employment Arrangements. The last time it was conducted was 2005.

    Arthur Chalekian GEPC
    [Financial Consultant]

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  6. Outlook for 2016?

    As we prepare our economic and investment outlook for 2016, we’re looking back at how 2015 unfolded. A year ago, we cited a number of key themes likely to affect the global economy in the coming years. These included the persistence of a frustratingly fragile global economic growth, deceleration in China’s growth, worries about global deflation, divergence in monetary policies, and the most guarded capital markets outlook since 2006.

    All these themes persist as 2015 winds down. At the same time, there have been some mild surprises. Europe’s economy modestly improved, especially in light of raised concerns over a “Grexit” from the euro zone in the summer. Select periphery countries such as Spain have improved somewhat more quickly than expected, although structural challenges remain. And, the United States economy continued its resilience, and the Federal Reserve has so far delayed raising short-term rates. However, the probability is high that Federal Reserve will raise interest rates next month.

    Our physician-investors know we emphasize the belief of “tuning out the noise” of short-term statistical updates and market movements. At the same time, we understand the importance of monitoring and analyzing economic and market developments. We do this not to prepare short-term forecasts, but to help form our long-term outlook. We think developing long-term outlooks that emphasize a defined range of possibilities can help investors to wisely manage expectations and establish realistic long-term goals.

    For example, as Vanguard and other investment firms prepare outlooks for 2016, we think it’s helpful to remember that uncertainty is an inherent part of investing. As we’ve said before, we strive to treat the future with the deference it deserves, and to remain comfortable with unpredictability. It’s a key reason our investment philosophy has always been grounded in the principles of balance, diversification, discipline, and taking the long view.

    Dr. David E. Marcinko MBA CMP
    http://www.CertifiedMedicalPlanner.org

    Like

  7. Giving thanks 2015

    Success in any endeavor is made up of two main components: skill, and luck.

    In psychology, the self-attribution bias refers to the idea that individuals tend to view success in life based on skill, whereas failure are attributed to bad luck and factors outside of one’s control. Watching someone slip on a banana peel? That guy is an idiot who can’t walk right! You slip on a banana peel? That’s some bad luck! The truth of course is somewhere in between. It is impossible to know how much of one’s success in life is because of skill and how much is because of luck because it is impossible to quantify. The overconfident naturally will argue success is driven by their own skill, and less on luck, while the humble likely have a better perceptual balance.

    In the realm of investing, performance is unequivocally driven by a combination of skill and luck. Those that make money attribute it to skill, while those who lose money attribute it to “the market” and bad luck. Here yet again, the truth is somewhere in between. The technical term for luck when it comes to investing is beta, while for skill it is called alpha. Good luck is a bull market in the S&P 500 SPDRs ETF (SPY). Bad luck is a bear market.

    Now some will argue that beta is not “luck” but those that invested in the market at the start of 2008 would likely argue their timing was a form of horrendous luck. Those in 2009? All skill as stocks rebounded and began a bull market unlike any seen since the late 1990s. The self-attribution bias can be hilarious to think about in its absurdity.

    Clearly, when it comes to an investing strategy, one cannot make decisions blindly. Luck is not a strategy. However, there IS skill in getting lucky, and exposing yourself to the potential for something positive to happen in your life. Yet, when it comes to investing, positive things don’t come from chasing performance and trying to be up more than the broader stock market. Rather, getting lucky means side-stepping extraordinary periods of volatility. No one can possibly predict on what specific day stocks will go down substantially, just like no one knows at exactly what mile marker one might crash a car. Good luck is avoiding the crash, yet the probability of avoiding such an event increases with the skill of recognizing your surroundings, and slowing down in anticipation. When it comes to markets, we can determine with historical leading indicators of volatility that conditions favor a potential big decline to come. This is something we discuss specifically in the summary versions of our award winning papers (click here to download). Skill in getting the luck of avoiding a big decline comes from following such indicators relentlessly. When luck pays off, like in the third quarter of this year, it tends to pay off in a big way.

    Skill (alpha) doesn’t come from being up more. It comes from being down less over long periods of time, and that in turn is precisely what results in a portfolio to be up more over time.

    This is the core principle of our alternative Morningstar 4 Star overall rated ATAC Inflation Rotation Fund (Ticker: ATACX, rating as of 9/30/15 among 234 Tactical Allocation Funds derived from a weighted average of the fund’s 3-year risk-adjusted return measures).

    Of course, in unrelenting periods of advance like the late 1990s, and the last three years, any attempt at getting lucky by avoiding periods of big declines using quantitative indicators looks like poor skill. However, just because an anomaly (predictable volatility) isn’t presenting itself in the short-term of but a few years doesn’t mean skill is poor, or luck is bad. It simply means the cycle does not favor that particular anomaly for a moment of time. Every day that goes by gets you closer to the cycle changing, as conditions change and the pendulum swings from passive investing outperforming active, to active outperforming passive.

    This Thanksgiving, we give thanks not to beta. We give thanks to alpha opportunities to come as the cycle inevitably favors more pulses of volatility, and more potential for active traders to showcase their skill beyond the small sample of yesterday.

    Let’s attribute future success more to that.

    Michael A. Gayed CFA

    Like

  8. China

    American markets were relatively quiet during Thanksgiving week but there were fireworks in China’s markets.

    Late in the week, media outlets reported the China Securities Regulatory Commission was conducting inquiries into several securities firms as part of an anti-corruption crackdown triggered by last summer’s wild market gyrations. The news sizzled through China’s stock markets. The Financial Times wrote:

    “It’s like a trip down memory lane… if memory lane was vertical… The Shanghai Composite was down by as much as 6.1 percent in late trade, with the tech-focused Shenzhen Composite following suit, down by as much as 6.8 percent. It would be Shanghai’s biggest one-day fall since August 25, when the benchmark slumped by 7.7 percent, writes Peter Wells in Hong Kong.”

    U.S. markets were sanguine, in part, because there was little activity on Friday, according to The Wall Street Journal. It also may have something to do with an upward revision in third quarter’s gross domestic product (GDP), which measures the value of all goods and services produced in the United States.

    On Tuesday, the U.S. Commerce Department reported GDP increased at an annual rate of 2.1 percent during the third quarter, an improvement over the initial estimate of 1.5 percent.

    Next week may be a doozy. The European Central Bank is expected to introduce additional monetary easing measures, while the U.S. Federal Reserve provides additional clues about the timing of its monetary tightening measures, said The Wall Street Journal. We’ll also get news about U.S. home sales, automobile sales, chain store sales, factory orders, and employment. It’s likely to be an interesting week.

    Arthur Chalekian GEPC
    [Financial Consultant]

    Like

  9. San Bernardino – CA Shootings

    U.S. stocks closed lower, with losses accelerating in the minutes leading up to and following the afternoon release of the Fed’s Beige Book, which showed economic activity expanded at a modest pace in most regions.

    The Fed data was delivered after an upbeat employment read and a speech from Chairwoman Yellen in which she appeared to keep heightened expectations of a December rate hike intact.

    In equity news, the Wall Street Journal reported that Yahoo’s board is expected to discuss whether to proceed with a plan to spin off its stake in Alibaba. Treasuries, gold and crude oil prices were lower, while the U.S. dollar ticked slightly higher.

    The Dow Jones Industrial Average (DJIA) decreased 159 points (0.9%) to 17,730, the S&P 500 Index was 23 points (1.1%) lower at 2,080 and the Nasdaq Composite declined 33 points (0.6%) to 5,123. In moderately-heavy volume, 953 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil dropped $1.91 to $39.94 per barrel, wholesale gasoline lost $0.07 to $1.29 per gallon, and the Bloomberg gold spot price decreased $16.44 to $1,052.85 per ounce.

    Elsewhere, the Dollar Index-a comparison of the U.S. dollar to six major world currencies-was 0.2% higher at 100.01.

    Stockton

    Like

  10. Well that was a volatile week!

    After rallying strongly leading up to the Fed’s “historic” decision to raise rates for the first time in nearly a decade, stocks reversed course even harder Thursday and Friday, with equity indices closing down on the week. Long duration Treasury yields rose, but came back in as several “risk-off” indicators began flashing red. Some argue the reaction was due to the realization that the Fed was actually much more hawkish than initially thought. While it seems ambitious to think that Yellen will be able to pull off hiking rates four times “gradually” next year, the reality is that the Fed has to move fast to normalize rates to have any kind of a shot at being effective in fighting the next recession. The irony, of course, is that in hiking rates aggressively to have ammunition for a recession, the stock market could cause one.

    Taking a step back – this has been an insane year. US equities are now down on the year, with significant devastation in individual stocks, commodities, and emerging economies. Despite additional Quantitative Easing from the European Central Bank and Bank of Japan, most equity indices worldwide are in the red for the past six months, with only 3 countries trading above their respective 200 day moving averages. Perhaps more stunning is that this has been one of the most volatile of volatility years in history, whereby the VIX index spikes out of nowhere, comes right back, and then immediately spikes again. The speed with which volatility has changed this year has been nothing short of incredible, and largely underappreciated by market participants. Many are bearish on equities now, but few are willing to actually position that way. Inertia is a powerful force when human beings have a natural tendency to manage risk after the fact.

    Now more than ever before it is important to consider context and perspective beyond the small sample we all live in. The media will focus on the potential for a “Santa Clause Rally” next week, but the reality is very few will actually try to position specifically for that. Nor should they – many cycles and calendar anomalies observed in the past may be worthless now given the Fed’s hike this year. What matters is how one positions into the next cycle now that the narrative has changed. The cycle is old, and time now favors a shift to new leadership. Whereas asset allocation and diversification beyond a few mega-cap stocks has resulted in mediocre performance, it stands to reason that the next few years will result in the opposite as volatility pulses become more frequent.

    On that point, it is important to understand why the dynamic for risk management is changing. Historically, Utilities and Treasuries have been proven leading indicators of volatility (click here to download our award winning papers proving this). In the last few years, every time these areas warned of coming volatility and correction risk, the market still pushed higher, resulting in false positives of these historically proven signals. With hindsight, the reasoning for this relates directly to the” hunt for yield” theme pushed into investor psyche. Historically, yield outperforms capital appreciation in bear markets and corrections. Yield became the bull market because of central bank interest rate suppression. Now, with rising rates, this dynamic changes, and likely makes those areas do well not because of bull market positioning, but volatility potential instead.

    For those who recognize that down capture is more important than up capture over long cycles, 2016 has the potential to be a watershed year. Sometimes, you just have to wait for the cycle to come to you. The Fed just became the catalyst for that.

    Michael A. Gayed CFA
    Portfolio Manager]
    http://www.pensionpartners.com

    Like

  11. FOMC

    After a level of hype that would have exhausted even the most dedicated Star Wars fans, the Federal Reserve finally began to tighten monetary policy last week, raising the funds rate from 0.25 percent to 0.50 percent.

    Although financial markets appeared sanguine when the rate hike was announced, the calm dissipated quickly. The Standard & Poor’s 500, Dow Jones Industrial, and NASDAQ indices finished the week lower. International markets fared better. Most finished the week higher.

    The last five times the Fed has begun to raise rates, the U.S. dollar has remained stable and stock prices have risen, on average, in the months immediately following the hike, according to The Economist.

    While tightening monetary policy (and talk of tightening monetary policy) often affects financial markets immediately, economic change happens at a more measured pace. The Economist explained:

    “The impact of changes in interest rates is not usually felt on announcement…The response of the real economy also comes with a delay. Most reckon it takes time for monetary policy to shift spending habits, and one rate rise is more an easing of the accelerator than a U-turn. Unemployment continued to fall in each of the past five tightening episodes. That will probably happen again…The most uncertain variable is inflation. This fell rapidly following rate rises in 1983 and 1988 as the Fed established its hawkish credentials. Yet in 2016, the most likely direction for inflation is up (the rate rise is aimed at restraining its ascent).”

    Another factor affecting the U.S. and global economies is the price of oil. Last week, The Wall Street Journal reported oil prices declined to a new six-year low. Falling oil prices have contributed to deflationary pressures in Europe, stunting the region’s economic recovery. They have had a mixed affect on the U.S. economy, helping consumers and hurting the energy industry.

    Arthur Chalekian GEPC
    [Financial Consultant]

    Like

  12. Wither inflation?

    Economic forces such as technology, globalization, and demographics are keeping inflation below the central banks’ target of 2% in key global economies. Those same forces keeping U.S. inflation in check will make it difficult for the United States to reach the 2% inflation target this year.

    Global economies haven’t recovered quickly from the last recession, keeping inflation lower than historical levels. And with inflation remaining below the Fed’s target, many expect the Fed to start normalizing its balance sheet and keeping interest rates at their current level in the near term.

    However, monetary policy changes could increase volatility in the stock and bond markets in the coming months. That’s why many economists recommend focusing on the long term and not reacting to sudden shifts in the markets as those turns could reverse as quickly as they occur.

    Dr. David Marcinko MBA

    Like

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