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Click here to listen to our latest recorded conference: https://goo.gl/145eBv

Content begins around the 3:30 mark.


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Today’s Closing Numbers…

  • DOW: 18,129, little changed at +0.05%

  • S&P 500: 2,139, even less of a change at +0.03

  • Crude Oil: $44.41/bbl

  • Gold: $1,314/t oz.

  • Silver: $19.32/t oz

  • 10-year Treasury Note Yield: 1.69%

  • 5-year Treasury Note Yield: 1.20%

  • 1-year Treasury Bill Yield: .61%

  • 30 Year Fixed Mortgage Rate: 3.57%

  • 5/1 Adjustable Rate Mortgage: 2.99%

AT HOME

  • U.S. Federal Reserve Monetary Policy

  • Financial news this month has thus far been dominated by the U.S. Federal Reserve’s interest rate policy, ahead of the Federal Open Market Committee (FOMC) meeting tomorrow, September 21. General consensus seems to be that Janet Yellen will leave rates unchanged, looking toward a rate-hike in December, instead.

  • Real Estate

  • Residential: There’s a lot of conflicting information emerging regarding the residential real estate market. This week we’ve digested the Wells Fargo Housing Market Index (which tracks sentiment among homebuilders on a monthly basis) hitting 65, which is up from 61 last year (Bloomberg, 9/19/2016). While this is not a very scientific index, this is still considered a striking jump, and shows that home builders are feeling positive about their business. More encouraging news includes a jump in mortgage applications and purchase volume, which is up 8% since this time last year (CNBC, 9/20/16). This could be attributed to more people trying to run out and buy a house before mortgage rates rise, as they are beginning to do. Conversely, however, today we hear that housing starts fell by 5%, falling more than expected in August as building activity declined broadly (CNBC, 9/20/16). Builders are citing supply issues as a main reason for this, such as the higher costs for land and labor, as well as a more restrictive landscape in terms of construction regulation.

  • Commercial: Earlier this month, Boston Federal Reserve President Eric Rosengren shared that “should prevailing economic conditions change in response to a large negative economic shock, commercial real-estate prices could decline relatively quickly, leading to large losses,” which could in turn trigger a broader economic downturn (WSJ, 9/19/16). I’ve been following the recent news about the US DOJ fining Deutsche Bank $14 Billion. The fine is said to settle claims over its issuance of mortgage-backed securities in the lead up to the 2008 financial crisis. So, how does this effect commercial real estate? Deutsche Bank is one of the biggest foreign originators of US commercial real estate loans. While it will likely be negotiated down, a fine of this caliber levied against the bank could mean they start to pull back on US lending, which would have a noticeable effect.

  • 2016 Election

  • We’ve written at length about the effect of the election on the stock market (read here). The New York Times, which uses a composite of several national polls, has Hillary Clinton in the lead at 45% of the vote, with Donald Trump closely trailing at 42%. Specifically among investors, 45% think Clinton would be better for the stock market versus only 34% for Trump, according to the latest quarterly survey from E*TRADE.

  • Polls are showing that the GOP is likely to keep control of the House of Representatives. The market tends to favor a divided Washington because it decreases the likelihood that any sweeping changes will occur. More so than that, Hillary is predictable. Markets like predictability, and many think that she wouldn’t stand in the way of the markets.

  • Technology

  • AAPL had a strong rally last week. After falling to a low point of $102/share, shares have moved to $114 and as of today they’re up more than 7% for the month. Initial worries about iPhone sales appear to have been overblown, as reports began to come out that the phones were actually sold out ahead of its launch. One must think iPhone sales were helped by their competitors’ problems, namely Samsung’s exploding phone. If you missed that, news came out this week that apparently Samsung rushed their suppliers in an attempt to get their phone out before the iPhone 7, and they’re now recalling over a million of the devices due to battery problems that cause the phone to heat up to the point of explosion in some cases. Why are we focusing on these individual companies, you might ask? Apple makes up about 3.5% of the S&P 500, so the combination of its size and price moves results in an enormous impact on the indices. So, a bit of last week’s volatility can certainly be attributed to this mega company.

ABROAD

  • Global Monetary Policy

  • Since our last market commentary, European Central Bank president Mario Draghi has left their interest rates unchanged, citing reasons familiar to us here in the US, saying that, “interest rates need to stay low for economic recovery to firm up” (Bloomberg, 9/8/16). I read in Business Week that banks are actually so opposed to the ECB’s negative interest rate policy that they are physically storing cash in their vaults rather than facing the penalty imposed by depositing the money with the central bank (ECB deposit rate is -.4%). The ECB’s reasoning here is that if they use a negative deposit rate, banks will be incentivized to loan the money out to customers instead. No word from Draghi on whether or not they will continue quantitative easing (QE) past their scheduled end date of March 2017.

  • Speaking of central banks keeping currencies low, a parting fun fact: Daryl and I were at lunch with a few fellow financial advisors last week that told us the Swiss National Bank now owns more publicly-traded shares in Facebook than Mark Zuckerberg. I looked into this a little bit further, and found from Reuters that as of their most recent quarterly filing with the SEC, the SNB actually owns $5.3 billion in US tech stocks, including Apple, Alphabet, Microsoft, Amazon and FB, and continues to buy equities. The SNB is now the world’s 8th biggest public investor. It’s hard to imagine that having the central monetary planners buying stocks with the money they print can end well. The SNB is exposed to much more stock market risk than the like of the ECB or the U.S. Fed.


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We think it’s important to understand that right now, the U.S. markets are closely watching every single piece of economic data that comes out, trying to gauge whether the Fed will raise interest rates later this month.

• For example, last week we heard that the U.S. created fewer jobs than expected in August (151,000 vs. the expected 180,000). That number might not seem like it was very far off, and unemployment remained the same, but it was still taken as negative news. The market didn’t exactly react as you might expect to this bad news, however, instead wondering if perhaps the Fed would reconsider their decision based on that data.

• This week’s news has mostly been focused on the ISM non-manufacturing index, which tracks the growth of US services companies. The index fell last month, suggesting that these companies were growing more slowly than in previous months- in fact, growing at their slowest pace in more than six years. Slow growth is still growth, however.

• Our point here is not to rattle off a bunch of statistics. We mostly aim to describe how the market is reacting to this seemingly negative news in a way that isn’t sending the market down. Because these relatively poor economic numbers may influence the Fed to forgo raising interest rates, the market is happy, or at least content.

• We also want to mention that activity has been much more subdued than usual in the US equity markets this summer. August saw one of the narrowest trading ranges since the 1920s. This is of course in sharp contrast to August of last year, when we had major volatility surrounding China’s currency devaluation.

On that note, let’s get out of the United States for a minute.

• On Monday we heard that Saudi Arabia and Russia agreed to start cooperating in the world oil markets. That briefly sent the price of oil up close to 5%, only for it to fall back to $44/barrel after Saudi Energy minister said there was no need to freeze output for now. We’ll be watching this situation closely. Oil is currently sitting at $47/barrel on news that U.S. crude inventories have decreased.

• In Europe, we’re not seeing any benefit from the European Central Bank’s negative interest rate decision or quantitative easing as Eurozone inflation remains extremely low. Consumer price inflation was less than half of the ECB’s target. Quantitative easing in the Eurozone is scheduled to end next year, however these inflation numbers and a 10% unemployment rate may change that.


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