Aaron Schaefer

Oct 05 2016

The Economy and Market from Here… at Hills October 2016

Economy and Market Here at Hills

BREXIT came and went with a lot of volatility.  Initially, global stock markets declined but reversed course quickly and have rallied throughout the rest of the summer.  The S&P 500 lost 5.3% following the election results, but immediately recovered and continued to tack on gains of just short of 9% since June 27th, two trading days after the vote.  Along the way, the index eclipsed record highs many times.  Year-to-date, the S&P 500 is up 7.8%.  International markets reacted similarly.  The MSCI EAFE Index—a common international stock benchmark—declined 9.8% following the referendum, but quickly recovered and gained 12.7% since.  Year-to-date the international index is up a modest 2.2%.  Interest rates were basically unchanged during the quarter.  The 10-year Treasury currently yields 1.61%, up slightly from quarter-end, but still down from where it was the day prior to the BREXIT election results.

The Federal Reserve Open Market Committee (FOMC) kept their benchmark interest rate unchanged in September, using the BREXIT vote and continued low inflation as reasons for standing pat.  Stock and bond markets are becoming increasingly volatile as the next rate decision approaches.  Every economic report is examined in excruciating detail in an effort to determine what impact it may have on the “data dependent” FOMC.

In general, global economies are improving, albeit at a much slower pace than many had hoped and anticipated.  Developed markets such as Europe and Japan are benefiting from unprecedented stimulus.  Emerging markets, such as China and Brazil, are also improving as commodity prices begin to stabilize.  Early reports indicate that any economic fallout from the BREXIT vote is limited to the United Kingdom.


Following the drama of the BREXIT vote, market volatility cooled significantly.  The S&P 500 went 43 trading days without a move of 1% up or down.  We do not think this will be the case going forward.  We expect markets to return to normal volatility leading up to the presidential election and in anticipation of each upcoming rate hike decision.  Stock and bond markets will likely react to every new economic data point, especially those pertaining to employment and inflation.  Many factors influence the FOMC’s decision, including events overseas.  We think they will err on the side of caution and that rates will be lower for longer than many anticipate.  Though we have been trimming in many seasoned accounts, we still think stocks provide the best long-term opportunities and continue to maintain an overweight position.  We tend to favor domestic equities, and recently increased our tactical overweight to small and mid-cap stocks after two years of underperformance by that asset class.

Many factors influence markets in the short-term, and our investment committee changes our tactical positioning to take advantage of dislocations created by such factors.  It is important to note, however, that some tenets remain in place no matter the market.  We believe that successful long-term investing takes discipline; one must be patient during market downturns, rebalancing if appropriate and remembering to trim when markets rally.  As always, if it has been a while since you’ve visited with us about your financial goals, please feel free to contact your account administrator.  They will find a mutually convenient time to review your account and determine if the current allocation is still appropriate for your circumstances.

Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.


Aaron Schaefer

About Aaron Schaefer

Aaron Schaefer is Vice President, Trust Investment Officer at Hills Bank’s North Liberty location on Forevergreen Road. He has been at Hills Bank since 2004 and manages the investment area of the Trust and Wealth Management division. Aaron can be reached at aaron_schaefer@hillsbank.com.

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