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BEIGE BOOK: WINDOW ON MAIN STREET DEC 2016

The Beige Book is consistent with our view that the Fed will raise rates later this month. At +64, the November Beige Book 2016 reading is now back in the middle of the range it has been in since early 2012.

IRRATIONAL EXUBERANCE PART TWO?

Valuations are elevated, but there is very little relationship between stock valuations and performance in the short term. Consumer confidence breaking out to new post-recession highs confirms the bull market in equities.

INTEREST RATE RISK

Amid fluctuations in interest rates, shorter-term fixed income may deliver lower price volatility than longer-term. Proper diversification across various sectors remains a prudent strategy to manage interest rate risk.

DECEMBER GAME PLAN

This month has several significant events that have the potential to be market movers. The ECB, Fed, and OPEC meetings are some of the events we’ll be watching.

WHAT HAS CHANGED FROM A YEAR AGO?

Treasury yields are very similar to this time last year, despite their recent sharp rise. We expect domestic growth and inflation expectations to push rates higher, though low foreign rates may continue to keep U.S. yields lower than they otherwise would be.

THE ECONOMY IN TRANSITION

The U.S. economic landscape is still running under its long-term potential and could benefit from policies designed to boost the economy’s productivity and its potential growth rate.

CORPORATE BEIGE BOOK: BETTER TONE, LITTLE ELECTION TALK

Our analysis of third quarter earnings conference call transcripts indicates sentiment among corporate executives improved. For all of the media attention on the U.S. election, corporate executives spent surprisingly little time on the topic during earnings conference calls.

MORE THAN JUST A TRUMP TAPER?

Last week’s Treasury sell-off is broadly being attributed to President-elect Donald Trump’s victory, and corresponding increases in policy uncertainty and expectations for higher deficit spending. While the Trump effect is at least partly to blame, other drivers including new supply, potential foreign selling, and the ever-present Fed, helped create the perfect storm for bonds.

EVALUATING THE ECONOMICS OF THE PRESIDENT-ELECT

The degree to which the election results impact volatility will depend a great deal on which policies are actually enacted as a result of the changes in Washington. Corporate tax reform, including repatriation that allows companies to bring overseas cash back to the U.S. at a discounted tax rate, stands a very good chance of being passed following the Republican sweep.

HOLIDAY SHOPPING PREVIEW

The National Retail Federation, a trade organization for retailers that tallies up holiday shopping totals each year, forecasts a 3.6% increase in holiday shopping this year. We see several reasons to expect consumers to potentially open up their wallets this holiday season, including low financial obligations, steady job and wage gains, and high consumer confidence.

TURNING POINT FOR MUNIS?

October was the worst month for municipal bonds since August 2013 as record supply and rising rates took their toll on the sector. Supply hit monthly records in August and September, and an all-time record in October, as municipalities tried to get issues to the market prior to any potential election- or Fed-driven volatility.

READY FOR THEIR CLOSE-UP? DEFICIT & DEBT

The good news is that the deficit, debt, and pace of federal spending are not on the market’s radar screen at this time. Currently, the only way to change the course of the deficit and debt over the medium and long term is to cut spending or raise taxes (or both) via meaningful programs, and in Washington today, neither seems very likely.

WHAT A WEEK

We reflect on last week’s surprising stock market reaction to Donald Trump’s unexpected election victory. The S&P 500 gained 3.8% last week, its best since October of 2014. The Dow Industrials and small cap Russell 2000 delivered their best weeks since December of 2011.

EARNINGS UPDATE: END OF A LONG DROUGHT

The earnings recession was not quite as long as the Cubs’ World Series drought, but we — like Cubs fans — are glad the drought is over. Corporate America ended its earnings drought in style, with S&P 500 earnings tracking to a 4% year-over-year increase for Q3 2016, well above prior estimates.

BONDS TO FED: READY, SET, HIKE

Positive economic data contributed to a rise in Treasury yields last week, a positive sign for the economy but painful for fixed income investors. Trends in fixed income markets signal that the economy is in good shape to weather a potential Fed rate hike in December.

HALLOWEEN SPECIAL: WHAT MIGHT SCARE MARKETS

Many measures of investor sentiment indicate widespread uncertainty about the direction of markets. The age of the bull market, U.S. elections, the possibility of a mistake by central banks, U.S. dollar strength, Brexit, and China’s debt problems all seem to have the potential to scare markets.

TIPS FOR STAGFLATION?

Rising inflation expectations coupled with slow economic growth (stagflation) may potentially benefit TIPS. TIPS and Treasuries may help protect in periods of volatility, though low yields relative to other parts of the bond market may hurt longer-term performance.

ENERGY INDEPENDENCE: WORTH THE COST?

Both presidential candidates have made achieving energy self-sufficiency part of their campaigns. The U.S. has become less reliant on foreign oil imports due to the exploitation of domestic shale oil, but it seems unlikely that the U.S. could ever meet all oil needs domestically. Both candidates’ energy policy statements reinforce their larger campaign narratives and reflect their respective world views, but neither seems to realistically address the underlying economics of​

ELECTION PLAYBOOK

n our election playbook, we discuss some investments that could possibly receive an election boost. Some areas that may fare better under Clinton include: alternative energy, emerging markets, and healthcare services. Some areas that could potentially get a boost from a Trump presidency include: biotech/ pharmaceuticals, energy, and financials.

HIGH-YIELD: CAUTIOUSLY OPTIMISTIC

High-yield’s impressive year-to-date performance has left the market on the expensive side of fair value and susceptible to pullbacks related to equity market or oil weakness. The high-yield market has already priced in much of the good news regarding decreasing defaults.

BOB’S BEIGE BOOK

We examine the economic, political, and market landscape through the lyrics of Bob Dylan, who won the Nobel Prize for Literature last week.

TAKING STOCK OF TECHNICALS AND SENTIMENT

Longer-term technical indicators on equities continue to look very strong. Overall market sentiment could be a nice contrarian reason to remain bullish.

MONEY MARKET REFORM: IMPACT ON INVESTORS

Markets have known about the upcoming money market reform (scheduled for October 14) for more than two years, and its impact may already be priced in. The upcoming reform has helped push Libor higher, benefitting asset classes that depend on it, including bank loans.

HOUSING CHECK-IN

We continue to expect housing may add to GDP growth in 2017 and for the next several years, as the market normalizes following the severe housing bust of 2005 – 2010. Housing affordability, housing supply, home mortgages supply, and home prices may largely determine the pace at which housing adds to GDP growth in the years ahead.

THIRD QUARTER 2016 EARNINGS PREVIEW: GROWTH RETURNS?

We believe the earnings recession may have ended in the third quarter. We expect potential upside to third quarter estimates due to supportive economic data, stable oil prices, and U.S. dollar stability​

FOURTH QUARTER PREVIEW: DÉJÀ-VU?

The Federal Reserve is pointing to a December rate hike in 2016, similar to last year, but yields are lower and prices are higher than this time last year. Economically sensitive sectors have historically weathered rate hikes better than their high-quality counterparts, but more expensive valuations warrant caution. Volatility in fixed income markets will likely re-emerge in the fourth quarter, as the presidential election overhang may keep markets on unstable footing.

TRADING PLACES: MOVEMENT OF GOODS…AND OPINIONS

This year’s presidential campaign marks a sea change in how our nation views foreign trade. The benefits and costs of trading relationships are complex; a rising tide does not lift all boats equally, and may not raise some boats at all. U.S. regions vary in what they export and to which countries; this may influence their view of the benefits and costs of trade.

WELCOME TO THE FOURTH QUARTER

Historically, the best quarter of the year is upon us. Although October has been strong recently, we expect the volatility that began in late September to continue.

MBS UPDATE

MBS may offer additional value versus Treasuries in a range-bound or rising rate environment. MBS valuations are broadly in-line with their post-recession average, and yield per unit of duration (interest rate risk) remains attractive relative to other high-quality sectors.

LISTEN TO THE LEADERS

The LEI provides a valuable monthly guidepost regarding where we are in the economic expansion. The LEI has to turn negative on a year-overyear basis to indicate a recession, which it has not yet done. Despite the weak reading in August 2016, we do not think the LEI is signaling a recession in the near term, although global and policy risks remain.

FIVE FORECASTERS: FEW WARNING SIGNS

Our Five Forecasters are collectively sending mostly mid-cycle signals. The Leading Economic Index, yield curve, and market breadth are all signaling the continuation of the economic expansion and bull market. Stock market valuations and the ISM Manufacturing Index are flashing some warning signs that are worth watching.

MUNICIPAL SUPPLY SURGE

The municipal bond market is dealing with a surge of supply of epic proportions, both from new issuance and existing supply in the secondary market. Historically, supply surges have often led to imbalances that resulted in price declines, but municipal bond prices have only showed minor cracks so far.​

EM EARNINGS: BEGINNING TO EMERGE

Earnings growth across emerging market (EM) equities has been positive in contrast to the decline in earnings and earnings expectations in developed international markets.

FOMC FAQs: WILL THEY OR WON’T THEY?

The Fed holds its sixth of eight FOMC meetings of 2016 this Tuesday and Wednesday, September 20 – 21, 2016. With a rate hike unlikely, the Fed may begin to prepare the markets for a hike in December.

TANTRUM BREWING?

We do not see the recent rise in Treasury yields as the start of another “taper tantrum” bond sell-off. Several diverse factors pushed Treasury yields higher last week, but their ability to persist is questionable.

SELL NOW?

This year’s stock market gains, the age of the bull market, and valuations beg the question, should investors sell stocks now?

BEIGE BOOK SUGGESTS CONTINUED MODEST ECONOMIC GROWTH

At +55, the September 2016 Beige Book Barometer reading is now back in the middle of the range it has been in since early 2012, suggesting modest economic growth may continue.

AUGUST RECAP

Mixed messages from the Fed and middle of the road economic data kept Treasury yields in a very tight trading range throughout August. Economically sensitive sectors continued to rally in August, while high-quality bonds lagged as Treasury yields moved toward the upper end of their recent range.

DIVIDEND BUBBLE?

Dividend stocks have garnered support as investors increasingly use stock dividends as a substitute for fixed income in the low interest rate environment. Friday’s slightly weaker than expected jobs report may add to the enthusiasm for dividend-paying equities.

A SEPTEMBER TO REMEMBER?

September is full of potentially influential market and economic events. Central bank meetings, presidential debates, and an emergency meeting for OPEC are some of the events we’ll be watching.

A DEEPER LOOK AT THE RISE IN LIBOR

3-month U.S. dollar Libor has increased by 0.2% over the past two months, which carries almost the same impact as a full rate hike, even though the Fed has not raised rates since December 2015. Investors in bank loans may benefit if Libor continues to rise, given that the floating rates may start to move higher once the 1% Libor floor that many issues carry is exceeded.

CORPORATE BEIGE BOOK: Q2 OFFERS FEW SIGNS OF IMPROVEMENT

Our analysis of second quarter earnings conference call transcripts suggests little improvement in corporate sentiment. Most management teams see only a minimal short-term impact from Brexit outside of currencies. Foreign currency remained a drag and low oil prices are still in focus.

DEFICIT? WHAT DEFICIT?

The structural and demographic problems that will drive the deficit higher over the next several decades remain in place, “but are receiving relatively little attention from policymakers and markets.” The longer policymakers wait to address them, the more difficult they become.

IS FOREIGN DEMAND FADING?

Foreign demand has helped drive Treasury yields lower and support prices over the past year, though increasing hedging costs may prove problematic moving forward. Demand from indirect bidders continues to be strong at Treasury auctions, muddying the argument that higher hedging costs may cause foreign demand to weaken.

WHAT THE MARKET IS TELLING US ABOUT THE ELECTION

This week we look at what stocks may be telling us about the presidential election. The relative lack of volatility this summer may indicate increasing odds the market is assigning to a Clinton victory. We also look at what some politically sensitive industry groups may be telling us about the election outcome.

FISCAL POLICY — STRING THEORY

Global policymakers initially countered the financial crisis with both monetary and fiscal policy; but monetary policy has been the tool of choice more recently. Fiscal policy tools are now being more actively considered.

THE PRICE OF SAFETY

Slow growth and negative interest rate policies have created an environment where it is difficult for bond investors to find value. The stretch for yield has caused income investors to take on more risk, and has stretched valuations of less traditional income sectors as well.

OVERSEEING POOR EARNINGS OVERSEAS

Corporate earnings, the most important factor in market performance, were poor in developed foreign markets last quarter. Forecasts for future earnings have been improving in emerging markets and Europe, but have declined dramatically for Japan. Strength out of the German DAX could be one clue that better times are ahead for Europe.

CAPEX CONUNDRUM

Like many other categories of GDP, business capital spending in the economic recovery that began in mid-2009 has lagged prior recoveries. Businesses must have the confidence to spend now for our economy to thrive in the years ahead.

HAS ANYTHING CHANGED?

A strong July employment report caused Treasury yields to spike higher, but the broader message from the bond market has not changed. Improvement in economic data will need to exhibit greater consistency to exert meaningful upside pressure to bond yields.

EARNINGS UPDATE: WE WERE HOPING FOR MORE

We were hoping for more out of corporate America this earnings season. Although the numbers have not been great, there have been some encouraging signs. The tech sector has produced solid results and forward estimates have been resilient.

EUROPEAN BANKS: NEITHER A BORROWER NOR LENDER BE

Banks everywhere are under pressure from the low interest rate environment. Corporate financing in Europe goes through banks, not the capital markets, making banks more important to the system. Monetary policy in Europe has just begun to increase bank lending, which historically has resulted in higher stock prices for banks, though the full impact of negative interest rates is difficult to determine.

HIGH-YIELD RALLY CONTINUES DESPITE HEADWINDS

High-yield has continued to rally recently despite weaker oil prices. Investors can still potentially benefit from a small allocation due to the asset class’s notable yield in a low-yield environment. Caution remains warranted, as oil may again drive the market.

SEE YOU IN SEPTEMBER?

We continue to expect that the Fed won’t raise rates until the December 2016 meeting, but a potential path to a September hike also exists. Key items to watch for a possible September hike include U.S. manufacturing, financial conditions, the labor market, wage inflation, foreign central banks, and comments from key Fed officials.

TIME FOR AN AUGUST SWOON?

We continue to expect an improving economic backdrop in the second half and a stock market with the potential for more new highs before year-end. However, growing near-term concerns are making the odds of some type of a late summer correction more likely.

EARNINGS UPDATE: CORPORATE RESILIENCE

We expect another quarterly earnings gain in the second quarter despite the drags from oil and the U.S. dollar. Improved global growth, lower energy costs, and effective cost controls have supported overall results. Although forward estimates have edged lower, we continue to expect earnings growth to accelerate during the second half of the year.

Be Prepared: Tips for Caring for an Ill or Elderly Parent

Illness or disability can come without warning. If you are faced with taking on the responsibility of caring for an aging parent or ailing loved one, these checklists may serve as a starting point for organizing your thoughts and building the network of financial, medical and other resources that can help.

Doing Good When Doing Well: Philanthropy and the Affluent Family

In order to choose the most advantageous charitable giving strategy, individuals and families must evaluate a number of factors, such as their need for current income, their desire to control and preserve assets during life and after death, their specific charitable intent, as well as important tax management issues.

BEIGE BOOK SUGGESTS CONTINUED MODEST ECONOMIC GROWTH

The latest Beige Book suggests that the U.S. economy is still growing at a “modest or moderate” pace that is at or above its long-term trend, and that some upward pressure on wages is beginning to emerge. Optimism on Main Street remains high despite the recent barrage of bad news on the economy.

How Much Do You Need to Retire?

Americans used to count on a pension plus Social Security to get them through their “golden years.” But times have changed. Today defined benefit pension plans are becoming much less common, people change jobs more often and most manage their own retirement funds through defined contribution plans.

Reduce Debt, the Systematic Way

In America today, carrying some debt is unavoidable but how much debt is tool much? Assess your debt and begin reducing it with three easy steps .

Inflation Happens: Don’t Let It Derail Your Long-Term Plans

A penny saved is a penny earned, right? Not necessarily. Thanks to inflation, over time that penny could be worth less than when it was first dropped into the piggy bank. That’s why if you're investing—especially for major goals years away, such as retirement—you can’t afford to ignore the corrosive effect rising prices can have on the value of your assets.

Federal and State College Financial Aid Programs

The cost of financing a college education can be daunting to many families. The good news is that a family does not have to be in a low-income bracket to qualify for many current aid programs.

Enhancing Charitable Gifts With Life Insurance

If you are a regular donor to charity, life insurance could help you to make a much larger gift to your cause of choice.1 Instead of making periodic cash contributions to a charity, you could use the same amount to pay the premium on a life insurance policy to benefit the charity. Upon your death, the charity would receive the full face value of your policy—which would likely amount to considerably more than you could afford to donate during your lifetime.

Managing Health Care Costs: Tips for Small Businesses

Employer-sponsored health insurance is considered by business owners and employees alike to be one of the most important benefits available in the workplace today. Yet skyrocketing costs are making it more difficult for small businesses to attract and retain skilled workers with the promise of health insurance

Understanding Your Retirement Income Replacement Ratio

Although the term retirement income replacement ratio sounds formidable, it’s actually a simple, understandable concept that doesn’t require any fancy math. The ratio helps you zero in on your retirement savings goal and periodically measure your progress as you move toward your target. Will you need 60%, 75%, 90% or even 100% of the income you have in your last year of work to maintain a desirable standard of living after you retire?

Investing Through Life’s Stages

Read this simple guide on how to get started in investing and how to reassess your investment strategies through multiple life changes.

Kids & Money: Nurturing Your Child’s Financial Growth

Most kids learn the basics of money and making change in elementary school, but probably won’t learn how to manage money unless they choose finance as a career path. That means it is up to all of us to see that our children reach adulthood prepared to face life’s fiscal challenges.

Keeping Up With Your IRA: Tax Season Tips

If you’re one of the millions of Americans who owns either a traditional individual retirement account (IRA) or a Roth IRA, then the approach of tax season should serve as a reminder to review your retirement savings strategies and make any changes that will enhance your prospects for long-term financial security. It’s also a good time to open an IRA if you don’t already have one.

Maintain a Good Credit Rating

For better or for worse, the American way of financial life relies on debt as a way of solidifying a desired lifestyle. Therefore, it is important to establish a good credit history if you intend on making more substantial, debt-financed purchases in the future.

 
Results: 70 Articles found.
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