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August 11 2015

Back to school…back to higher interest rates?

After a solid July jobs report arrived on Friday – 215,000 new jobs were created and unemployment remained at 5.3 percent – analysts were pretty confident there would be ample support for a Federal Reserve rate increase (a.k.a. liftoff) in September. Bloomberg reported the odds of a September liftoff shot from 38 percent to 52 percent just last week.

The pending rate increase was not a surprise, but investors were ruffled and U.S. stock markets moved lower. According to Barron’s, the Dow Jones Industrial Index has lost value for seven days – its longest losing streak in four years.

However, nobody was reaching for a panic button:

“…The decline in U.S. stocks has raised few alarms in part because it’s been gradual and doesn’t seem tied to any fundamental flaws in the economy. The natural drift of the market now is lower because, frankly, there are few obvious catalysts to lift stocks higher. Large-company U.S. stocks fetch valuations well above their historical averages and their earnings aren’t growing. Paying more for these stocks ahead of a Fed rate increase equates to “fighting the Fed,” a prospect investors look upon almost as favorably as sticking their fingers in an electrical outlet.”

The Fed rate increase is expected to be slow and gradual, but no one is certain what will happen after it begins. Russ Koesterich, Chief Global Investment Strategist at BlackRock,expects, “Short-term bonds will be most affected by higher rates, while longer-term bond yields should inch up at a gentler pace. High-dividend stocks that have served as “bond market proxies” are also likely to suffer, but overall, stocks’ reaction to liftoff should be relatively tempered.”

Sources:
http://www.reuters.com/article/2015/08/07/us-markets-global-idUSKCN0QC00R20150807
http://www.bloomberg.com/news/articles/2015-08-05/wall-street-says-yellen-poised-to-end-long-run-of-zero-rates
http://online.barrons.com/articles/dow-suffers-longest-losing-streak-in-four-years-1439009810?mod=BOL_hp_we_columns

  • Data as of 8/15/151- WeekY-T-D1-Year3-Year5-Year10-Year
  • Standard & Poor’s 500 (Domestic Stocks)-0.0130.0090.0880.140.130.054
  • Dow Jones Global ex-U.S.-0.81.6-4.75.72.82.5
  • 10-year Treasury Note (Yield Only)2.2N/A2.41.62.84.4
  • Gold (per ounce) -0.5-8.8-16.7-12.1-1.99.6
  • Bloomberg Commodity Index-1.4-13.3-29.2-14.3-7.7-5.7
  • DJ Equity All REIT TR Index0-0.99.310.212.57.7

*Indices are unmanaged and investors cannot invest directly in an index.
*Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
*S&P 500, Gold, Dow Jones Global ex-Us, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend).
*The DJ Equity All REIT Total Return Index does include reinvested dividends.
*All investments involve risk – coins and bullion are no exception. The value of bullion and coins is affected by many economic circumstances, including the current market price of bullion, the perceived scarcity of the coins and other factors. Therefore, because both bullion and coins can go down as well as up in value, investing in them may not be suitable for everyone. Since all investments, including bullion and coins, can decline in value, you should understand them well, and have adequate cash reserves and disposable income before considering a bullion or coin investment.

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Bart A Zandbergen, CFP® is a Registered Investment Advisor with Optivest, Inc and a Registered Representative with Gramercy Securities, Inc. Investment advisory services are offered by Optivest, Inc. under SEC Registration and securities are offered through Gramercy Securities, Inc., member FINRA & SIPC, 3949 Old Post Road, Charlestown, RI, 02813, 800-333-7450.

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