Initial Reactions to the FED

Greetings everyone! Welcome to another installment of Money Matters. Well it was all eyes on the FED meeting last week, and as anticipated, proved to be a global event. The response to the meeting summary however, was not received well, and resulted in a broad based sell off across most regions and sectors. As mentioned in last week’s Money Matters “any slight indication or hint to a possible end date will be what most traders are hoping not to hear ahead of the anticipation.” So, with the chairman of the FED, Ben Bernanke, announcing that if economic conditions continue to improve it’s likely the FED will start winding down their stimulus (unless the economic conditions weaken), this was enough to send the markets into a tizzy, and we saw some quick movements in the downward direction. The US markets dropped about 3% last week with most other regions following suit, while global indices were down around the world.
Investors didn’t seem to notice all the loop holes the FED has left themselves as a result, and simply looked to dump equities and assets in general. We don’t expect the drop of a few percentage points to alter the FED’s decision, and the losses do seem to be stemming faster than expected with the US markets even posting some small, but positive gains on Friday. We’re not saying that the volatility is over and the buyers will start flocking back to the markets right away, but it is interesting that the initial impact only lasted two days before changing direction. It’s still a little early to tell whether that is simply a case of too much too fast, or whether it’s a more fundamental belief the markets will reverse back up. But there does seem to be some resilience in the markets, and considering everything that’s going on, the drops are not as big as we’ve seen in the past.
On that note, we’ve been discussing China and its manufacturing numbers recently within Money Matters, and that they have posted some of their weakest number in the past 10 months. To elaborate on this a little further with regards to market reaction, Turkey and Brazil have been experiencing some political unrest, while much of Europe is still dealing with the same issues (as they have been for months), yet the markets haven’t had the 10% drops that we’ve seen in recent years when a combination of bad news hits the market all at once. So again, it’s a bit early to tell which direction the markets will go in the short term but it might be a fair assessment that much of the bad news has already been priced into the markets and is thus one of the reasons for the smaller volatility swings we are seeing.
For those investors looking to be a bit more cautious during this volatility, bonds and fixed income assets will likely be the avenues to look at, as even though they will fluctuate, bonds and fixed interest funds shouldn’t fluctuate nearly as much as the equity markets. On the other hand, investors looking at this time as a buying opportunity could consider emerging markets which may be good value with many emerging countries having fallen more than their developed counterparts such as the US and Europe. For the majority of longer term investors we continue to recommend a balanced and diversified approach and to maintain a strong focus on the longer term view.
For Austen Morris Associates’ investors – talk with your advisor about any repositioning to take advantage of markets at this time. For more information about Austen Morris Associates please visit our website.
Darren Cox
Co-Head of Portfolio Management
Austen Morris Associates Wealth Management & Investment Team
www.austenmorris.com