First Quarter Investment Policy Committee Report

By Terry Treiber, CFP®

After climbing for much of the year, all the major stock market indexes were down in September.

SeptemberYTD12 months
Dow Jones Industrials-4%1%16.5%
S&P 500-5.25%12%20%
Emerging Markets-4.25%.05%8%

The direction and volatility of the market is largely been driven by the increase in interest rates. The 10 year treasury has gone from 3.7% to 4.8%, putting an incredible amount of stress on valuations and markets. Long-term treasury investments are down as much as 17% over the last 12 months. The Fed has been telling us that interest rates were going to be higher for longer and we are seeing the effects.

We are in the 11th month of a manufacturing contraction but services continue to be robust. Employment has been holding up. But the possibility of government shutdown, foreign countries like China backing away from purchasing our treasury securities and the Federal Reserve reducing their reserves are among the issues causing concerns in the market.

Third-quarter GDP came in at over 4% but economists like Brian Westbury from first trust cautions us to be skeptical and doesn’t believe that kind of growth continue, referring to it as a “head fake.”

The investment policy committee has pared back its equity allocations. We believe equities, specifically large-cap, present opportunities but strongly recommend hedging where possible. We are less optimistic about foreign markets and emerging markets.

Government securities and municipals are probably the strongest areas in the fixed income space. We don’t believe that high-yield and emerging markets debt present good value. There is more risk than is worth taking. In an environment where you can earn 5 to 5 ½% on cash, there is a lot less justification for buying anything on the long end.

While we are still confident overall, we are watching for the effects of the dramatic increase in interest rates and hedging our bets. Some committee members have been making more use of structured notes. Some downside protection with upside opportunity is attractive in this market.

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