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Commentary on Federal Reserve Announcement - September 2015

Friday, September 18, 2015

Dear Investor:

When I last corresponded with you on August 25th, global equity markets were declining due to Chinese economic weakness and uncertainty on the timing of the Federal Reserve’s much anticipated decision on interest rates. At the time, I anticipated that China would respond with continued stimulus and that the Federal Reserve was going to defer raising rates until December or, more likely, well into 2016. Both of these short-term uncertainties are now known. China continues to inject liquidity into its economy and is trying to prop up its stock market, and the Federal Reserve decided yesterday to not raise interest rates at this time. Each of these events has, and will continue to have, a significant impact on U.S. stocks as measured by the S&P 500®. On August 24th, the S&P 500® had an intraday low of 1867 and closed yesterday (September 17) at 1990, a positive change of about 6.5%.

Why did the Federal Reserve not raise rates?  While China’s weakness and its systemic effect on the emerging markets was a consideration, I believe that the key factor keeping interest rates at zero was the strong move in the U.S. dollar since the beginning of the year.  A strong dollar makes companies that export products less price competitive and hurts profitability.  The S&P 500® reports that over 45% of sales come from abroad.[1]  Though the U.S. economy is growing, it is growing at a very slow rate and a strong dollar from rising interest rates could hurt the recovery. In addition, inflationary pressures do not currently exist and the Federal Reserve can afford to be behind the curve.

In the short run, stocks could mark time or move lower before moving higher by year-end.  We are more than halfway through the correction that started in August and the seasonal period when stocks are traditionally weak.  As we get into October, earnings season will start.  We will see how strong the U.S. economy is and how global financial events have impacted corporate profits.  I do think that earnings will be fine, particularly those companies that are more exposed to the U.S. recovery.    

When the financial crisis started, the U.S. was the first major economy to go into recession.  Other economies, notably China’s, took longer to slow and questions remain: when and how their economies stabilize and begin to grow. We don’t believe that China has as big an impact on the U.S. economy as market moves might indicate.  On the other hand, a persistently strong dollar could negatively impact the U.S. economic recovery and the Federal Reserve does not want to do anything that could impede the recovery.  I will continue to update you after earnings are reported.  



Dennison “Dan” T. Veru

Executive Vice President, Chief Investment Officer




[1] Strategas Research Partners, L.L.C.

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