October 2015 Monthly Strategy Dashboard

October—A focus on earnings as the S&P 500 Q3 earnings season gathers steam will not deter investors from also keeping sharp attention on economic data that could influence the Fed’s decision on raising rates when the FOMC meets on October 28.

“To hike or not to hike?” Remains the question for Fed Chair Janet Yellen and company. A recent moderation in dollar strength could provide the Fed with some additional leeway in making its decision.

Traders near mid-October are betting that there’s only an 8% chance that the Fed will hike rates at the end of the month. They assign only a 29% chance for a hike in December and a 52.9% chance for it to happen in March. The take for now among traders is that the Fed will opt to stay put on concerns that the dollar could gain strength on back of a rate hike and further challenge US exports and profits at US multinationals.

As we go to press with this month’s chart book, investors’ concerns seem weighed more toward the recent slowing in pace of economic growth stateside and abroad witnessed in data points than about risks that rates could rise.

After having initially reacted negatively to the Fed’s not raising rates in September, the rally from September 28th through the first thirteen days of October indicated a deeper sense of relief that rates might stay lower for longer.

At the end of the day we continue to believe that modest wage growth, currency risk (if rates move higher) and concerns that a collateral bump in mortgage rates could slow the housing recovery (along with sundry other reasons, including the opinion that inflation for now appears the lesser risk versus disinflation) could keep the Fed on hold for yet another FOMC meeting.

The two-year Treasury yield (a bellwether for Fed rate adjustments) at 0.55% at this writing supports the expectation that the Fed will not raise later this month.

September’s disappointing non farm payroll number along with downward revisions to the prior two months readings of that data point adds even more support to the case for low rates to stick around longer than most expected.

We continue to adhere to the adage “don’t fight the Fed” and take the transparency of the Fed’s stance as giving reason to believe that a platform for a stock market rally has been put in place.

While investors shouldn’t expect the markets to move upward in a straight line, a mix of developments in M&A as well as rallies among large, mid, small and mid cap stocks and cyclical sectors points to the market sensing better things lie ahead and valuations that appear more attractive than not.

Looking back over recent market history we see parallels in today’s market with that of 2011. Recall that the S&P 500 delivered flat performance for the full year in 2011 as a result of a 19.6% drop in the first half-year, which the market overcame in the second half—posting a fourth-quarter rally that drove stocks some 16% higher from a low on October 5th through the end of that year. Stocks then tagged a further rally of some 11% through the start of 2012 to a first-half high in April of that year.

A combination of low inflation, low interest rates, cheap oil, low commodity prices and affordable labor remain components for a recipe for sustainable economic growth stateside and higher stock prices into the start of next year. We think that as economies in Europe and Japan gain further traction, the opportunity to see a global recovery take hold in 2016 is not all that far fetched.

Stay tuned.

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