Importantly, the Federal Reserve met last week and increased the Fed Funds rate by 0.25%. In our opinion, the Fed missed the opportunity to initiate rate normalization earlier this year. Now confronted with weaker earnings, low inflation and a deteriorating high yield market, the Fed seems to have painted themselves into a corner. The initiation of normalization/tightening policies to combat mildly improving labor markets appears divergent from the easing policies of our important trading partners – Europe, Japan and China. Although the Fed followed through with their telegraphed rate hike from a credibility perspective, the factors cited above will likely restrict their ability to meaningfully raise rates in 2016.
Although we acknowledge that disruptions in the high yield market often portend difficult periods in the economy and/or equity markets, we believe the intermediate and long term out-look for high quality U.S. and International equity returns re- mains favorable and exceeds the returns present from currently low yielding fixed income securities. Given current levels of low interest rates and likely long term equity growth rates, we believe broad classes of equities are priced fairly — with high current relative earnings yields — and should deliver returns similar to their long term historical averages. The change in Fed policy does not dissuade us as we believe intermediate term future policy is intended to just remove the now-unnecessary extraordinary accommodative policies initiated during the 2008-2009 recession. In our view, equities remain the beneficiaries of moderate economic growth, fair prices, low inflation and continuing low levels of interest rates.
Sean Clark is the Chief Investment Officer and Anthony Soslow is a Senior Portfolio Manager, both at Clark Capital Management, which is a participant in the ETF Strategist Channel