April 10, 2017 – Weekly Market Commentary


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Selected Highlights From the Fed Minutes

If the economy remains stable, the Fed hopes to reduce their balance sheet this year. The fed wants to gradually reduce their balance sheet in a predictable way to avoid market shocks. They also noted the rapid rise in equity prices and that some areas of the markets are priced “quite high” relative to standard valuation measures. The members had mixed views on inflation with some believing that accommodation should remain in place until 2% inflation was sustained while others believe that the current inflation trend is strong enough to warrant a faster pace of scaling back accommodation.


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Fergal O’Brien – Bloomberg Markets
Euro-Area Unemployment Falls to Lowest Level in Eight Years

The Euro-area average jobless rate declined to 9.5% in February. This is the lowest level in almost 8 years. ECB President Mario Draghi said last month that the decline in joblessness shows the success of the central bank’s bond-buying program. Another important note, the euro-area factory PMI rose to 56.2 in March from 55.4 in February, well above the 50 level that indicates economic expansion.


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Bob Bryan – Business Insider
The Stock Market Doesn’t Think Trump Will Deliver On One of His Biggest Economic Promises

Recent market data shows that Wall Street doesn’t think that the Trump administration will be able to push corporate tax cuts through anytime soon. Since the election, “stocks of the companies with the least to gain from tax reform have performed the best since the election, and those that have the greatest to gain have performed the worst.” Stumbling blocks such as divisions within the Republican Party and reports about changes to the tax plan have fueled further skepticism.



Jeff Cox – CNBC
The Fed’s New Frontier: What Happens, Why it Matters, and What Could Go Wrong

The Fed is planning to begin the process of shrinking its $4.5 trillion balance sheet which grew to unprecedented levels as a result of QE bond purchases. To unload the balance sheet there are two options, it can allow the bonds to run off naturally, or it can actively sell them back into the market before maturity. Letting the bonds mature is the preferred option because actively selling the bonds could create a supply glut which would lead to higher interest rates.


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Russ Koesterich, CFA – Global Allocation Team – BlackRock
Small Caps Looking for a Catalyst

The rally in small-cap stocks has stalled recently. Koesterich thinks that a declining appetite for risk and stretched valuations are to blame for the slowdown in small-caps. High-yield credit spreads have been widening indicating a lack of demand for risky assets. On the valuation side, the Russell 2000 trades around 48x trailing earnings which is particularly pricey compared to other market caps. Small caps will look more favorable if Washington makes progress on tax reform and fiscal stimulus.


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John Gittelsohn – Bloomberg
Gundlach Says Bond Rally to Continue With 10-Year Yield Falling

A bond rally is likely to continue with yields on 10-year Treasuries poised to head down in the short term, according to DoubleLine Capital CEO Jeffrey Gundlach. “I don’t think we’re going to see 3 on the 10-year this year” he added. Gundlach has cautioned that the president’s plans are “bond unfriendly” because they could fuel deficits and inflation.


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Kathy A. Jones – Chief Fixed Income Strategist – Charles Schwab
Emerging Market Bonds: Can the Hot Start In 2017 Continue?

Emerging market (EM) bond prices are off to a strong start this year due to a softer US dollar and reduced concerns about protectionist trade and Federal Reserve rate hikes. Jones believes that EM bonds can continue generating strong returns during Q2. Investors will have to stomach higher volatility and political risks, but high yields and diversification benefits make EM bonds an attractive asset class.





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