Last week we mentioned that our expectation was for a fairly busy week in terms of data and factors that could affect the global capital markets. We hardly expected to see such negative activity within the markets despite the economic data being OK. So, this week we will focus on the short term drivers within the global capital markets that are dominating trading floor activity, which has resulted in the pullback that we have seen so far this month.
To set the table for context, we first need to remember that September, by historical average, has typically seen the lowest returns for capital markets since 1939. Volatility also typically rises considerably during the month as global money managers get back from August vacations. The fourth week of the month, i.e. this week, has historically seen the highest level of that volatility as we come out of the first “triple witching” of Index Futures, Index Option and Equity Options all expiring. I know the last sentence reads like Greek to many readers, but what “triple witching” really means is that there is an inordinate amount of Index / ETF / Mutual Fund / Hedge Fund rebalancing going on worldwide thus very high volatility, which quite often results in a negative month.
That is the context for the short term, and as Max Breier, senior derivatives trader at BMO Capital markets in New York said in a note today, “These periods of heightened volatility have been short-lived.” We have increasingly held greater levels of cash throughout the summer months in anticipation of a modest market pullback, and will look to take advantage of this heightened volatility and put our cash balances to work.
Ironically enough, it has been the improving longer term economic data out of the United States that has been one of flies in the ointment over the past week, as durable goods orders and weekly jobless claims out of the U.S. have bolstered the argument that the economy may be improving at a quicker pace than the Federal Reserve had originally forecast. As a result, there has been considerable discussion that the Federal Reserve may raise rates sooner than later, thus the greater volatility in the markets.
Given the fact that the Federal Reserve’s Quantitative Easing (QE) monetary policy program is coming to an end next month, the focus has turned to what maintaining low interest rates for a considerable time really means. You will get a different answer from just about everyone you ask, but we were in Toronto earlier this month meeting with institutional fixed income managers, and it is our opinion that we could see rates begin to rise in the second quarter of next year ( March to June timeframe) and that the interest increases will be modest during 2015. We continue to investigate where we think rates will be in 2016, and are strategizing to best position our clients well in advance of that.
This morning we saw that the American economy expanded during the second quarter at the fastest rate since the fourth quarter of 2011, as companies increased investment spending and households continued to spend. We saw that GDP (Gross Domestic Product) grew at 4.6%, up from the previous estimate of 4.2%. Forecasts for second quarter GDP, the value of all goods and services produced in the U.S., ranged from 3.4% to 5% according to Bloomberg.
We like the momentum we have been seeing, especially on the corporate spending side; this should continue to further strengthen labour conditions, which in turn typically leads to strong consumer spending. Why this is an important driver of the markets today is that Federal Reserve policy makers are openly debating how much longer to keep interest rates at near zero levels. Thus the heightened volatility we have seen over the past few weeks.
One key asset class that we continue to see good value in and continue to own is Real Estate; however we do see this asset class being affected by rising interest rates later next year and into 2016. Now most real estate investment companies, commonly known as REITs, have also taken advantage of the lengthy period of very low interest rates and have refinanced much of their long term debt (mortgages) at very low levels, thus we expect that impact to remain modest.
On that note, Canaccord Genuity is once again hosting our annual “Evening of Real Estate” at the Four Season Hotel on Thursday October 23rd. There will be some wonderful speakers and the event will provide timely information about the Real Estate markets. There are limited seats remaining for this event, so please call Lindsay Dreger at 604.699.0285 to reserve your seat.
Thank you for your trust.
As always, we welcome any feedback. Have a great long weekend.
The Dekker Hewett Group