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Weekly Vantage Point | 9.28.15

Fed Policy Confusion Sent Stocks Lower

September 28, 2015 — Stocks fell last week, as investors expressed concerns about the pace of world growth and uncertainty surrounding the Federal Reserve's plans on raising interest rates. The Fed sparked the debate over whether the U.S. economy is strong enough to withstand a rate hike. Fed Chair Janet Yellen said in her press conference following the September 17th "no-change" rate decision that policymakers' primary concerns were downside economic risks on China and emerging markets. The S&P 500 declined each day last week except on Monday, when a handful of Fed members spoke out in favor of a rate hike. Partial clarity came on Thursday when Yellen confirmed in a speech that a rate hike is still appropriate this year, adding however that "economic surprises" could change that plan.

In key economic data last week, existing home sales declined 4.8% in August from July's eight-year high, while the 6.2% year-over-year sales figure has decelerated to the slowest pace since February. Turning to new home sales data, a different picture emerges. Newly-built home sales last month shifted into a higher gear, rising to a 552,000 annualized pace, the highest since February 2008. The most pleasing data release last week was an upward revision for the final reading of second quarter GDP. The Friday report showed the U.S. economy expanded by 3.9%, up from a prior estimate of 3.7%.

An additional overhang to performance was a major selloff in biotech stocks, triggered by a tweet message from presidential candidate Hillary Clinton, suggesting there is "price gouging" in the market for prescription drugs. The NASDAQ Biotech Index tumbled 13% during the week. For the week, the S&P 500 fell 1.35%, the Dow Industrials slipped 0.43%, and the NASDAQ Composite sank 2.91%. Seven of the ten major sector groups declined with Healthcare (-5.75%), Materials (-4.01%) and Industrials (-1.97%) down the most last week. Utilities (+1.27%), Consumer Staples (+0.74%) and Financials (+0.53%) advanced. Treasures prices edged lower, lifting the yield on 10-year Treasury notes by 2.9 basis points to end the week at 2.163%.

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Words of Wisdom

"If the world were perfect, it wouldn't be."

"I'd give my right arm to be ambidextrous."

"It's tough to make predictions, especially about the future."

— Yogi Berra

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
DOW -0.43% -1.29% -8.81% -8.46% -3.73%
S&P 500 -1.35% -1.94% -7.65% -4.77% 0.28%
NASDAQ -2.91% -1.83% -8.06% -0.21% 6.15%
Russell 3000 -1.72% -2.12% -8.22% -4.68% 0.54%
MSCI EAFE -3.09% -4.29% -12.67% -4.49% -8.79%
MSCI Emerging Markets -4.87% -3.39% -19.38% -15.80% -21.18%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond -0.24% 0.32% 1.11% 0.77% 2.49%
Barclays Municipal 0.25% 0.45% 1.52% 1.49% 2.98%
Barclays US Corp High Yield -1.45% -1.39% -4.23% -1.24% -2.49%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity 0.87% -2.68% -12.28% -15.16% -25.68%
S&P GSCI Crude Oil 1.51% -7.11% -23.45% -14.21% -50.63%
S&P GSCI Gold 0.69% 1.16% -2.24% -3.25% -6.25%
Source: MorningStar
Implications of European Central Bank (ECB) Stimulus Options
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A Quantitative Easing (QE) Extension is Most Likely

We think that an ECB announcement in October will be more impactful than in December, as it will come as a surprise to the market. However, given the recent comments by ECB council members, expectations for October are increasing. Exhibit 11 above summarizes the most likely policy innovations as well as market reactions if the ECB acts/ guides the market in October. We expect any new ECB action to be broadly bullish for rates. An additional possibility is for the ECB to include other assets (e.g., buying corporate bonds), while increasing monthly purchases.

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Week's Economic Calendar

Monday, September 28: Personal Incomes & Outlays, Pending Home Sales, Dallas Fed Mfg Survey;

Tuesday, September 29: S&P/Case-Shiller Home Prices, Consumer Confidence;

Wednesday, September 30: ADP Private Jobs, Chicago PMI;

Thursday, October 1: Weekly Jobless Claims, PMI Mfg Index, ISM Mfg Index, Construction Spending;

Friday, October 2: September Non-farm Payrolls, Factory Orders.

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Weekly Trivia

Today: What animal can go without water for longer than a camel?

Last Week: What is the only grain native to North America?

Answer: Wild Rice (and it is actually classified in the grass family).

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