Markets barely moved in response to the much-anticipated announcement that the Fed would begin reducing its balance sheet. For the week, the S&P 500 inched 0.1% higher. The MSCI ACWI edged up 0.3%. Bonds fell on the Fed’s announcement, causing the Bloomberg BarCap U.S. Aggregate Bond Index to slip -0.2%.
The Fed’s announcement contained few surprises as it announced a plan to gradually reduce its balance sheet while keeping the possibility of one additional rate hike on the table for this year. The size of the Fed’s balance sheet leads some investors to question how smoothly the Fed will be able to reduce its mammoth holdings of U.S. bonds.
Key bullet points for the week
- Federal Reserve announced its plan to reduce its balance sheet gradually over a number of years
- No rate hike this meeting, but governors generally favor one more hike this year and additional hikes in the future – peak rate of 2.75% rather than the previous project of 3%
- China credit rating downgrade – China is a mixed picture of lots of debt and a strong economy
What are we reading?
Below are some areas of the market we paid particularly close attention to this week. For further information, we encourage our readers to follow the links:
The Fed decided to start the process of rolling off its 4.5 trillion dollar balance sheet. These roll-offs will mostly consist of Treasuries and mortgage backed securities acquired during the quantitative easing process. The plan is to let $10 billion roll-off monthly, starting in October 2017, and increase the amount each quarter until it reaches $50 billion per month. The Fed also did not raise the benchmark interest rate but said one more hike is likely before year-end.
Shrinking the balance sheet may not be as painless as some say. The Fed expects the steady decline in its balance sheet to have minimal impact because the process involves not reinvesting rather than outright selling. Others disagree by pointing out that long-term rates will likely be affected by the steady pressure of finding new demand for billions in bonds month after month.
The S&P downgraded China’s debt from AA-minus to A-plus which follows a similar decision in May by Moody’s. The decision is based on rising concerns about the growing debt of the country. A sovereign rating downgrade is a kind of vote of no confidence in economic prospects of the country and the government’s capabilities to manage risks. It may also increase the cost to raise future funds. Though debt is increasing, China’s economy continues to expand at a rapid rate of 6.5%.
Fun Story of the Week
Have you thought about going above and beyond on Halloween decorations this year? If so, you might want to consider how far you take them. One particular Halloween display has the Greene County Sheriff’s Office issuing a PSA to stop people from calling 911. A local resident has what appears to be a dead body in front of his garage which has caused a panic to witnesses driving by. The influx of calls to the Sheriff’s Office increased so much that a PSA was a must to calm the local residents who thought they witnessed a murder. I think it is safe to say this Halloween display killed it.
This newsletter was written and produced 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 views stated in this letter are not necessarily the opinion of CWM, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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 ACWI INDEX
The MSCI ACWI captures large and mid-cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.