‘Tis The Season For A Rate Hike

As 2015 draws to a close, global markets are entering a period of transition. The interest rate environment, commodities market, emerging economies, and western politics find themselves at turning points. Over the next 12 months, investors should expect a series of pivotal announcements that impact global markets.

The US economy continues to outperform its competitors in the developed world. The US unemployment level is now at 5% and wage growth is finally starting to show signs of life. Analysts get excited about wage growth, which indicates that the employment market is getting more competitive. That should make employees more optimistic about their job prospects and gives them the confidence to start spending money again.

After months of speculation about the Federal Reserve’s plans to raise rates, analysts expect this employment data is the good news that the Fed needs to raise rates during its December meeting. This would represent a significant change in Fed policy, since the Fed has not raised rates since 2006. Any rate increase will be small, but represent an attempt to return to “normal” interest rates. Investors in retirement will be especially pleased, since higher interest rates will give more flexibility to find higher returns in lower risk investments.

Meanwhile, European monetary policy is headed in the opposite direction. Europe is still mired in the doldrums of low inflation and lackluster market performance. Even after the European Central Bank (ECB) initiated a stimulus program to prod the market, the same conditions persist. In response, the ECB announced that it is willing to strengthen and extend its stimulus program until markets respond. Combined with the weakened Euro currency, this announcement should make Europe more attractive to investors that are willing to speculate on its recovery.

On the other side of the world, China’s manufacturing sector continues to slow. That slowdown started more than two years ago and those manufacturers saw it coming. Thinking that it was temporary, they continued to borrow funds and attempted to keep growing at the same rate. Unfortunately for them, this slowdown is actually the result of a generational shift in China’s economy. China’s economy is maturing. It’s exiting its industrial age and progressing toward a consumer-driven age. The other economic powers are taking note of this shift. The International Monetary Fund just added the Chinese currency to its list of global currencies. The immediate impact of that decision is mostly symbolic, but it is confirmation of China’s influence on the global economy.

Chinese manufacturers may be the first to suffer as a result of this transition, but the effects are rippling through the global economy. Nowhere are those ripples more apparent than in the commodities market. Industrial metals, like copper and zinc, and oil are at multi-year lows. For years, China drove the commodities market and pushed it to record highs as it bought enormous quantities of raw materials to fuel its growth. As prices climbed higher, commodity producers ramped up their production to meet that demand. Now that China’s manufacturing sector is slowing, those same producers are hesitant to cut their production and lose market share, and the result is oversupply and falling prices. The sinking commodities market affects the prospects of production companies, but it is also taking a toll on resource-rich countries. As an example, Brazil rode the wave of Chinese commodities demand for years and is now having its worst year in two decades as it struggles with low commodities prices. These resource-driven economies will need to adapt to China’s changing appetites.

Market Movers

November was a difficult month for investors, but the final months of the year are often tricky due to tax season. This year, concerns about rising interest rates, international uncertainty, and volatile commodity markets are prompting some additional reshuffling. As we navigate this period of transition, we are patiently holding our portfolio allocations steady, but will begin making several allocation changes in early 2016.

Since the beginning of 2015, US stocks and bonds were generally flat, but foreign investments and hard assets retreated significantly. Morningstar’s World Allocation Fund Category, which most closely represents our Core Allocation portfolios, pulled back more than 4% year-to-date. All of our Core Allocation portfolios have been more resilient relative to this benchmark, and ultimately provide added value to our investors.