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Content provided by Matt Santini, CLS Portfolio Manager

One of the most commonly fielded questions as a portfolio manager is the classic, “What are you watching?”   This is indicative of sideline money, nerves, and just simple opinion missions.   When a domestic market is experiencing such robust gains, the questions tend to have a pessimistic undertone.  Since it is tough to argue against the merits of manufactured liquidity, a lot of my time has been focused on understanding the market’s perception of the Fed. This is especially true when the end of QE3, as we know it, is looming.   (I wonder if Michael Stipe feels fine?)

These are some things I am looking for the Fed to address over the upcoming two day meeting:

1)      JOBS: Is the labor market still firing on all cylinders?  We know the rate has dropped, but so has the pace of job growth. The merits of the participation rate are widely debated.  Is this participation rate snafu structural or cyclical?

2)      GUIDANCE: A declining unemployment rate below 7 percent is supposed to trigger talks of a rate hike.  If the rate is declining for all the wrong reasons (noted above) can we expect Ben Bernanke to tone down his 6.5 percent line in the sand?

3)      FORECASTS: The Fed will share their crystal ball with us as it pertains to 2016 projections. Where are they forecasting inflation, growth, and unemployment?  Short-term rates are currently factoring in muted expectations.

4)      HOUSING: CLS has debated housing long enough for the cows to pull an all-nighter.  Housing data has definitely softened since the last Fed meeting. The minutes did not seem to think higher mortgage rates would slow the recovery.  This is important because housing is a driving force behind the recovery thesis.

5)      INFLATION: Low inflation continues to persist. It is nowhere near the Fed’s target of 2 percent.

We believe these topics, combined with the “TT” (token taper), will likely move rates, metals, and stocks with little correlation.

 

 

1848-CLS-09/18/2013