Ben Bernanke concluded a two-day meeting of the Federal Reserve Board of Governors with the announcement that the Federal Reserve was likely to reduce its $85 billion asset purchases as the economy continues to improve. This long-awaited announcement was not definitive, but has provided the market with the catalyst to begin adjusted prices according to market forces and not manipulation by the Federal Reserve.
The results have been notable. Bond yields on the 10-year US Treasury have rapidly moved up to 2.6% from 2% just a month ago. While short-term rates remain relatively stable, stocks and bonds have recently traded in tandem. Typically, these asset classes are not highly correlated, but today’s market is an exception as prices seek to find an equilibrium. After an initial sell-off, equities began to stabilize last week. However, Asian markets sold off dramatically over the weekend leading to concerns about global growth. Of concern, specifically, is the Chinese economy which has been the largest driver of global growth in recent years.
We believe that the fundamentals for the US equity markets are intact, and that we are likely in the midst of a long-overdue correction. Recent levels on the S&P 500 were 7.5% off the 52-week highs, erasing the gains achieved since April (obviously not a very long time horizon). The market last pulled back 10% after the 2011 debt ceiling debate and subsequent downgrade of US sovereign debt by Standard & Poor’s. Such pullbacks represent buying opportunities for active investors, and we are on the lookout for attractive companies whose stocks prices previously exceeded our valuation criteria. As yields rise, so too does our universe of securities that are eligible for the Cutler portfolio.