Week of September 26, 2016
The markets began last week on a positive note, only to end a three-day progressive streak with Friday's dip. Despite the uncertainty injected into the markets by ever diverging central bank policies, equities were broadly up. The S&P 500, Dow Jones Industrial Average and the NASDAQ added between 0.75% and 1.2% last week. Internationally, emerging markets were the clear outperformer with the MSCI Emerging Markets Index up 3.62% last week. In this edition of our weekly commentary we discuss the impact of central bank actions and the market's reactions along with a look at oil. We conclude with a story on the mysterious Null Island.
Divergent Fed Policies
All eyes were on the US central bank this week. Last Wednesday, the Federal Reserve announced that it will not be raising rates this month but, based on Janet Yellen's comments, it appears the markets may be heading for a December rate hike of 0.25%. While the size of the move is relatively minor, it's the direction that is significant. For context, when compared to other countries' central banks, the US Federal Reserve is one of the only banks to be considering a rate increase, let alone actually following through. This is where the larger risks may be lurking. For example, the Bank of Japan revealed just before the Federal Reserve meeting that they intend to target longer term bonds in an attempt to push rates back above 0% to provide some respite for pension funds and insurers while at the same time signaling that the bank intends to keep short-term rates negative to boost inflation. Conversely, the Federal Reserve is signaling that it intends to raise short-term rates and it's this dichotomy that will likely continue to drive market distortions over the near term. In other key projections, Federal Reserve officials cut their growth forecast for 2016 from 2% during their June meeting to 1.8% and in line with their long-term expectations. The unemployment rate is now projected to be 4.8% and inflation pegged at 1.3% whereas the June forecasts were 4.7% and 1.4%, respectively.
Market Reaction to Fed
Markets were generally up on the news of the Federal Reserve standing pat and the Bank of Japan pursuing further stimulus actions. As we mentioned in our introduction, our domestic markets were all up for the week after falling Friday. The S&P 500, NASDAQ Composite and Dow Jones Industrial Average were up 1.19%, 0.76% and 1.17% for the week, respectively. When looking intra-week, the market was anything but smooth. Markets were flat prior to the Federal Reserve's comments and, immediately following the news, investors pushed equities higher to close near session highs. Taking a deeper look at international markets, Japanese equities rose in spite of the uncertainty injected by the BOJ and the rising yen. European equities also notched higher in response with the MSCI Europe Index closing the week up 2.83%. Oil, which we dissect below, was up for the week. Crude, bought and sold in US dollars, can be highly affected by movement in the greenback which is in turn impacted by central bank policies. With no hike from the Federal Reserve last week, the US Dollar Index fell, making oil more affordable for foreign buyers. The US Dollar Index, which tracks the US dollar against a basket of six currencies, including the euro and Japanese yen, fell after the Federal Reserve's decision as investors left dollar-denominated assets.
We periodically touch on oil but it's been almost a month since we last examined the commodity. Geopolitical unrest, supply uncertainty and even central bank actions have all impacted oil over the past week. The seizure of Libya's four export ports caused a spike earlier last week, however, Libya accounts for roughly 2% of all oil production worldwide. Why then the reaction by the markets? Investors are perhaps worried about more than just Libya. If neighbors such as Iran or even Saudi Arabia are affected with similar unrest, the outcome could significantly impact oil dynamics. When we look beyond unrest and its impact on supply, the Organization of the Petroleum Exporting Countries, or OPEC, has publicly stated that non-OPEC countries are likely to expand production in the second half of 2016. For example, Iran is promising to go back to pre-sanction levels and most Middle Eastern oil producing countries are approaching full-capacity as they seek to retain market share. While OPEC members are set to discuss a potential freeze, investors have heard this story before and an agreement at this point seems unlikely. Indeed, oil prices plummeted nearly 4% on Friday based on news that Saudi Arabia does not expect a decision during next week's talks. On the demand side of the equation, crude inventories fell by 6.2 million barrels as of September 16th. This marks the third weekly decline and a cumulative drop of 21.2 million barrels. While this may sound positive for oil, the massive drop can largely be attributed to the recent storm in the Gulf of Mexico which has disrupted shipping and production in the region. Despite all the factors pushing and pulling on the commodity, crude oil ended the week up less than 5%.
Fun Story of the Week
A tiny island in the Gulf of Guinea about 1,000 miles off the west coast of Africa exists, called Null Island. According to its official website and tourism bureau, this bustling island is home to roughly 4,000 people that speak their own distinct native language. What's more, the island also boasts the highest per capital use of Segway scooters. Sound like a farce? Technically, the island doesn't exist, however, numerous people are directed to Null Island when they make a mistake using online search websites such as Google and Natural Earth, a digital mapping data set. The reason why searchers are directed to Null Island is due to an oddity built into these online systems. When an error is made in a search, either through coding errors or typos, users are sent to 0 degrees longitude and 0 degrees latitude, landing them right in the middle of the Gulf of Guinea on the fictitious Null Island. While cartographers get the tongue-in-cheek reference, not all are as quick on the uptake. Indeed, a Dutch travel agency contacted the island's "tourism bureau" on its elaborate (for a fictional country) website created by retired data analyst, Steve Pellegrin. To say the least, the agent was surprised to hear the island doesn't exist.
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This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI EUROPE INDEX
The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
MSCI EMERGING MARKETS INDEX
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa. Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
Wall Street Journal, September 2016. http://www.wsj.com/articles/oil-prices-slip-as-opec-meeting-looms-1474624136
Null Island, September 2016. http://www.nullisland.com/
Wall Street Journal, July 2016. http://www.wsj.com/articles/if-you-cant-follow-directions-youll-end-up-on-null-island-1468422251
CNBC, September 2016. http://www.cnbc.com/2016/09/21/fed-leaves-rates-unchanged-in-september-meeting.html
Wall Street Journal, September 2016. http://www.wsj.com/articles/investors-stuck-between-two-central-banks-1474492976
Wall Street Journal, September 2016. http://www.wsj.com/articles/boj-changes-policy-framework-after-review-of-measures-1474432869