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.
