WEEKLY INVESTMENT COMMENTARY   – Digesting the Implications of Higher Rates






Ninety-nine percent of the failures come from people who have the habit of making excuses.

George Washington Carver




BlackRock NOVEMBER 9, 2015

We expect the rise in longterm rates in the U.S. to be contained. But the fact that U.S. rates, both long- and short-term, are rising while rates are falling in much of the rest of the world has a number of implications. The data may be mixed, but still point to a decent U.S. economy. That, along with some evidence of stabilization in international markets, has pushed the odds of a December interest rate hike by the Federal Reserve higher.

Stocks Climb Against a Backdrop of Higher Rates Stocks climbed higher last week, with investors exhibiting a mixed reaction to a sharp rise in both nominal and real (i.e., after-inflation) U.S. interest rates. The techheavy Nasdaq Composite Index fared best, adding 1.86% to close the week at 5,147, while the Dow Jones Industrial Average rose 1.39% to 17,910 and the S&P 500 Index advanced 0.96% to 2,099. Meanwhile, the yield on the 10-year Treasury climbed from 2.15% to 2.33%, as its price fell. Two-year Treasuries followed a similar path. We expect the rise in long-term rates in the U.S. to be contained. But the fact that U.S. rates, both long- and short-term, are rising while rates are falling in much of the rest of the world has a number of implications. Among them, it suggests the dollar will continue to strengthen, keeping pressure on precious metals, and supports the case for hedging currency exposure in international stocks. Equities Keep a Quality Focus Last week, stocks benefited from a strong report from the services sector along with the announcement of more mergers and acquisitions. That said, there are several factors inhibiting further gains: high valuations, a dearth of top-line growth and most recently, a noticeable deterioration in credit quality. U.S. corporate defaults recently hit a four-year high. Moreover, defaults of speculative-grade bonds (those rated lower than Baa) climbed to 2.5% from 2.1% in the third quarter. That is still modest by historical standards, but credit ratings agency Moody’s expects defaults to rise further, to 3.8% by next October. The shift in the credit regime has implications for stocks. Namely, we continue to favor a tilt toward quality — that is, companies with a high return-on-equity, low earnings variability and modest financial leverage. Over the past three months, this approach has outperformed a focus on momentum names, companies with rapid price appreciation. While momentum has been an effective style over the past several years as markets generally marched upward, it has struggled since volatility began to rise in the late summer. Higher Short-Term Yields: Good for the Dollar, Bad for Gold Last week provided more evidence that it is increasingly difficult to characterize the state of the economy with a single number. For example, the manufacturing sector is struggling, as seen by October’s ISM Manufacturing Survey, which fell to 50.1, the lowest level since the spring of 2013 and barely above contraction territory. However, the services sector continues to demonstrate resilience, while



Russ Koesterich Managing Director and BlackRock’s Global Chief Investment Strategist, as well as Global Chief Investment Strategist for BlackRock’s iShares business. Mr. Koesterich was previously Global Head of Investment Strategy for active equities and a senior portfolio manager in the U.S. Market Neutral Group. Prior to joining the firm in 2005, he was Chief North American Strategist for State Street Bank.


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Walter Unger CCIM, CCSS, CCLS

I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years.  I am also a commercial land specialist in Phoenix and a Landspecialist in Arizona. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial /  Investment Properties in Arizona,  I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us. 

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