It’s Not Just the Fed’s Balance Sheet That’s Changing


Two special notes before I start this week’s commentary. First, L’Shanah Tovah to those of you celebrating Rosh Hashanah.

Second, though our Investor Conference is getting close to selling out, there is still time to register. You will want to hurry because late fee pricing will go into effect on Monday, September 25. The event is being held in Orlando, where both our conference facilities and hotels incurred no discernable damage from Hurricane Irma. (Our hearts and prayers go out to everyone who has been affected by this summer’s storms.) The conference is a great opportunity to learn and meet fellow AAII members. Click here to learn more and to register.chart

Yesterday, the Federal Open Market Committee (FOMC) announced its plan to unwind its balance sheet. Starting next month, the Federal Reserve will stop reinvesting $6 billion of proceeds from maturing Treasury securities and $4 billion proceeds from maturing agency debt and agency mortgage-backed securities. The dollar amounts will be gradually rising each month, subject to adjustments as warranted. The FOMC also updated its forecasts for economic growth, keeping the annual long-term projection for GDP expansion at 1.8%. Interest rates were left unchanged and expectations for how rates will be raised next year trended downward.

All of this is occurring as Fed Chair Janet Yellen’s term will expire in February. It’s not clear who will actually hold the seat when the next term starts. In addition, President Trump will have four Federal Reserve Board vacancies to fill once vice chair Stanley Fischer steps down in October. Former senior Treasury official Randal Quarles’ nomination for the board is currently pending before the Senate.

The sheer number of personnel changes could alter future monetary policy from what it would have been. Yellen’s approach has been dovish. The FOMC under her tenure has been very cautious about raising rates and pulling back monetary stimulus even with a tightening cycle now occurring. A big reason has been lower-than-expected inflation. The chart at the right is an update to one I published a year ago. As you can clearly see, long-term growth expectations—though unchanged from 12 months ago—remain below levels projected in 2012 and 2013. Continue Reading »

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AAII Model Portfolio Update

Ultra Clean Holdings (UCTT) was sold from the Model Shadow Stock Portfolio because its price-to-book ratio exceeded the valuation limit of 3.0. The proceeds from the sale of the stock—which had tripled in value—were used to add Amira Nature Foods Ltd. (ANFI), Delta Apparel Inc. (DLA) and Strattec Security Corp. (STRT).

The AAII Model Shadow Stock Portfolio, which is a real-money portfolio of micro-cap value stocks, fell 2.1% in August. The Vanguard Small Cap Index fund (NAESX) lost 0.9% for the month, and the DFA U.S. Micro Cap fund (DFSCX) shed 2.2% in August. Since its inception in 1993, the portfolio has realized an annualized return of 15.8% versus the Vanguard 500 Index fund’s (VFINX) gain of 9.3%. The DFA U.S. Micro Cap fund (DFSCX) has an annualized return of 11.4% over the same period.

No changes were made to the Model Fund Portfolio. The portfolio declined by 0.9% in August, versus a 0.3% increase in the SPDR S&P 500 ETF (SPY). Since its inception in July 2003, the Model Fund Portfolio has an annualized return of 8.8%, while the SPDR S&P 500 ETF has an annualized return of 8.9%.

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Highlights from this month’s AAII Journal

  • Take RMDs Early or Late in the Year? – There are pros and cons to taking required minimum distributions at year-end, at the beginning of the year or at regular intervals throughout the year.
  • The Factors Driving Dividend Policy – An analysis of global dividend policies attributed the rationale for companies to pay and raise their dividends to many factors.

AAII Sentiment Survey

Optimism declined slightly, while pessimism bounced back from a 17-month low last week. More about this week’s results.
This week’s results:
  • Bullish: 40.1%, down 1.2 points
  • Neutral: 32.7%, down 4.1 points
  • Bearish: 27.2%, up 5.2 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

Take the Sentiment Survey.

The Week Ahead

We’ll see more companies announcing results during what is the run-up to the third-quarter earnings season. Included in the group are S&P members Carnival Corp. (CCL) and Red Hat Inc. (RHT) on Monday; Darden Restaurants Inc. (DRI), IHS Markit Ltd. (INFO), Micron Technology Inc. (MU), Cintas Corp. (CTAS) and Dow Jones industrial average component Nike Inc. (NKE) on Tuesday; and Accenture PLC (ACN), ConAgra Brands Inc. (CAG) and McCormick & Company Inc. (MKC) on Thursday.The week’s first economic reports will be July S&P Case-Shiller home price index, August new home sales and the Conference Board’s September consumer confidence survey. All three will be released on Tuesday. Wednesday will feature August durable goods orders and August pending home sales. The final revision to second-quarter GDP and August international trade will be released on Thursday. Ending the week, August personal income and spending, the September Chicago purchasing managers’ index and the University of Michigan’s final September consumer sentiment survey will be released on Friday.Ten Federal Reserve officials will make public appearances. New York president William Dudley, Chicago president Charles Evans and Minneapolis president Neel Kashkari will speak on Monday. Cleveland president Loretta Mester, Atlanta president Raphael Bostic and Fed Chair Janet Yellen will speak on Tuesday. Minneapolis president Neel Kashkari, St. Louis president James Bullard and Boston president Eric Rosengren will speak on Wednesday. Kansas City president Esther George will speak on Thursday. Philadelphia president Patrick Harker will speak on Friday.

The Treasury Department will auction $26 billion of two-year notes on Tuesday, $13 billion of two-year floating rate notes (FRN) and $34 billion of five-year notes on Wednesday and $28 billion of seven-year notes on Thursday.

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