2016 is off to quite a start. We mentioned last quarter that the situation in China had potential to impact the economy in the United States, and this week is evidence of that. While the turmoil in the stock market doesn’t directly represent the state of the larger economy, it does indicate the sentiment of investors, who are clearly spooked by the combination of a failing Chinese economy and forever tumbling oil prices.
The Federal Reserve’s interest rate increase had little effect. The Treasury market had already priced it in. The CMOs we focus on saw a small dip in prices at the end of the year, but those prices have since recovered with the recent stock market decline, and Treasury yields have dropped below where they were before the rate change. The possibility of another hike seems less sure now than it did a week ago. The news is thick with comparisons of current levels to this or that previous crisis. Last month’s Fed decision seems like an effort to prod the economy into moving, rather than an attempt to keep it reined in.
Still, despite what is happening outside our borders, the U.S. keeps puttering along. The labor market has maintained its relative strength, and consumer sentiment remains solid, though not exuberant.
Overall, what we said in our last letter remains true – there is not a clear direction for the economy. Too many conflicting factors leave us with a muddled picture. It seems clear that the hum-drum news propping up the U.S. is not enough to keep us protected from the turmoil in the rest of the world. Eventually, those effects will reach past the emotional stock market and hit more pivotal areas of U.S. financials.
We continue to be comfortable with our portfolio positioning, as rate hikes are only becoming less likely. We will continue to see some fluctuations in bond values, but these hold little significance beyond giving us opportunities to buy at lower prices. 2016 promises to keep investors on their toes. Happy New Year, and please reach out with any questions.
This information is not intended to be used as the only basis for investment decisions, nor should it be construed as advice designed to meet your particular needs. You are advised to seek the advice of your financial adviser, legal or tax professional, prior to making any investment decision based on any specific information contained herein.
