Welcome to “The Week Ahead” where each Friday we take a moment to provide our thoughts on what we can expect in markets and the economy for the upcoming week.

Hurricanes! Sanctions! Missiles! Bombs! Global meltdown! North Korea fired another missile over Japan yesterday while another terrorist attack hit London this morning. Yet, the market once again keeps trucking along as both the S&P 500 and Dow hit new record highs this week. After close to breaking 2.0% on Monday, the 10-year U.S. treasury is now back above 2.20% while gold has retreated back below $1,350. As of this morning the VIX, the “fear index”, is currently at 10, well below the 15.55 we saw just a month ago.

Looking back, the Fed was the first central bank to take up unconventional monetary policy during the great global recession. They cut rates to zero in December 2008 and instituted multiple rounds of asset purchase programs (QE) from 2009-2014. At the end of 2015, we saw liftoff as the Fed raised rates for the first time since 2006. We expect the Fed to continue their path back to normalization by announcing their balance sheet tapering program next week. Prior to yesterday’s CPI reading, investors saw a 22% chance of an interest rate hike in December – those expectations have now increased to 47%. A year in which the Fed delivers on their guidance would be impactful for the future, as it builds confidence in central bank guidance which could mitigate events such as taper tantrums.  

Like the villagers in Aesop’s fable, The Boy Who Cried Wolf,  Investors have become more and more complacent as volatility has remained low. Per a Callan Associates report, back in 1995 a 7.5% return for a portfolio was achievable with a 100% bond portfolio. In 2005 to achieve that same 7.5% return, one would have had to increase risk by reducing bond exposure to 52%. In 2015 to achieve that 7.5% return, bond exposure would have to be further decreased to 12%. Oh, and the difference in volatility between the 1995 and 2015 portfolio? About three times more! While the broad market has become complacent, we continue to believe holding some dry powder remains prudent. 

Data deck for September 16 – September 22: