Strategy meeting held on September 14, 2015

Last week the S&P Global 1200 Stock Index was up 2.2 per cent but some clients are still nervous. The Nervous Nellies, as we call them, want to see the markets rally. We see this as an opportunity to commit more money to the markets and if our clients wait until the market rallies, the opportunity to profit from this sell-off will be lost. US stock indices are flat to slightly down so far today but our high conviction calls such as Apple, Tesla, and Skyworks are up over 1 per cent already. Asian indices were mixed and European indices are mostly down in local currency terms.

The debate on whether the Fed Funds rate will be raised this week continues. Our fixed income specialist sees it coming this week with a commentary from the Fed afterward stating that further hikes are likely to come at a very slow pace. Central banks do not like to make future commitments so the rest of us are sceptical.

Goldman Sachs sees that the recent sell-off, an increase in corporate borrowing costs, and the rise of the dollar have effectively tightened financial conditions roughly equivalent to three 25 basis point hikes in the Fed Funds rate. From Goldman’s perspective the markets have done the Fed’s “dirty work” and for this reason the hike is not likely to take place until December. (Behind poker face, I enjoy a satisfied smile as I expect the hike in December myself.)

Our most senior portfolio manager changes her expectation of an interest rate hike to sometime in 2016. (Satisfied smile hidden once again.) I stick with my view of a December hike but my fixed income specialist makes the point that the hike is already priced into the market and that should it be raised this month, financial markets are unlikely to be affected. He has a very valid point.

Last week’s US economic indicators show that consumer sentiment fell in August to the lowest level in a year, but this sentiment was largely influenced by the fall in stock values. Positive news on jobless claims indicate that fewer Americans filed for jobless benefits, highlighting the persistent strength of the US labour market. Jobless claims have been below 300,000 for six months now and job openings are at the highest level since December 2000.

On the inflation front, wholesale prices fell 0.8 per cent in the year to August, and consumer prices to be announced next week are expected to be almost flat. The Federal Reserve’s mandate is to provide non-inflationary full employment. Employment is strong and inflation is weak. The Fed has no reason to raise interest rates right now although the markets have already priced in three such hikes, according to Goldman Sachs.

Robert Pires, MBA, CFA is the chief executive officer of Bermuda Investment Advisory Services Ltd, which is licensed to conduct investment business by the Bermuda Monetary Authority. He can be contacted at rpires@bias.bm.