October 28, 2014 - “The End of QE”
What a great time to travel abroad. Your US dollar is worth more today in most parts of the world than it has been in a long time. But how has the strong dollar affected the markets and, more specifically, 3D’s investment outlook and strategy? To understand these issues, we need take a closer look at some of the factors driving currency prices and the economy in general.

The US Federal Reserve has, over the past few years, accumulated quite a stockpile of fixed income instruments. 4.4 trillion dollars’ worth, give or take a few billion. Many would argue that a result of the Fed’s buying spree or Quantitative Easing (“QE”), which began in 2008, was responsible for the restoration of some of the fundamental drivers of economies and markets, namely investor confidence, access to capital, continued low rates and liquidity in most sectors of the bond markets. Certainly the US stock markets have recovered and investors, at least those who have not been sitting on the sidelines, have done well in their equity portfolios.

Overall, our view for developed foreign equities for the remainder of 2014 continues to be positive. Stock valuations on average are still low and corporate financial statements are healthier than a year ago. The business environment overseas in these markets is trailing the US but trending in the same direction which may mean that there is slightly more upside currently in foreign stocks.

When a slowdown in QE was first signaled early this year, the stock and bond markets reacted negatively but both recovered quickly. Recently, Fed Chair Janet Yellen indicated that QE will end in October. Since that announcement, US equity markets have seen increased volatility and have declined. As of October 14, the S&P 500 was off over 6% on a price-only basis and has seen some dramatic daily moves. The news outlets are calling this the beginning Total Federal Reserve assets, Source : Federal Reserve of a bear market, but if you take a step back and look at the recent declines as a natural correction in a bull market that began in March of 2009, the move is nothing dramatic. As you know, 3D has a long term outlook in its equity investment philosophy. If an investor’s portfolio cannot afford a 5 – 10% short term decline, they should be less exposed to equities.

In our opinion, the steady decrease in the Fed’s bond buying to date has not adversely affected the underlying fundamentals driving the equity markets. However, it may be influencing the currency market. With interest rates being pushed down by the European Central Bank (“ECB”) and a signal by the Fed’s Open Market Committee (“FOMC”) that we may be seeing a Fed Funds rate increase next year, both current and future bond yields seem to favor the US. The higher rate environment in the US is one of the primary causes for a strong US Dollar.

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