Interest Rates

Much to do about nothing is the best summation of the interest rate discussion on the US. After more

than a year of expectation the September 2015 announcement by the Fed came and went with rates left

unchanged. In our view, it is unlikely that the Fed Funds Rate will rise in the next 2 quarters. By the

Feds own metrics, inflation is almost non-existent and the unemployment rate, though falling, is doing

so for all the wrong reasons and does not indicate a robust labor market. Lower rates for longer will

likely persist.


This brings us rather quickly to the Orient and the impact that the Chinese market has had on events

here in the West. Fears of a slowdown in China most definitely played into the decision for the Fed to

stand pat on rates, which is remarkable and denotes how global our financial system is truly becoming.

In our view, China is a story of a people in transition not an economy on the ragged edge. As they

transition from a manufacturing base to a more consumption-driven growth model there will be

missteps, as we have seen with market volatility as a result. While we would advise a high degree of

caution regarding any direct investment in China, we’re largely constructive on their longer-term growth

trajectory and believe it unlikely that their issues will create a global recession.


US equities have shown a level of resilience, having bounced 8.9% from the lows of September. Most

notably, the short positions outstanding at the height of the selling pressure have not been reduced,

which means this current rally has been the result of fundamental conviction on the market and not

simply driven by short covering. International equities have found support as well, but performed more

poorly than US stocks in the short term. While volatility in both US and International markets is likely to

persist, we are largely constructive on both and feel particularly bullish on the prospects for

international markets given the vast liquidity being produced by central banks, particularly in Japan and



Bonds have performed poorly up until the end of September as market participants prepared for a rate

increase that didn’t materialize. Dollars are flowing back into bonds in rather dramatic fashion over the

past few weeks as the prospect for a rate increase diminishes. In fact, US demand for Treasuries has

been so robust that it has made up for the Chinese selling of these bonds over the summer. This is

notable as many have feared the day when China would reduce its share of US debt; that day has come

and thus far is a non-issue for the bond market as a whole.


Commodities, particularly gold and oil, have rebounded dramatically in the past two weeks as the US

Dollar has weakened and bargain shoppers have come back into those markets. We believe the worst is

over for both of these assets while volatility will undoubtedly persist. We are not of the persuasion that

oil prices will rebound quickly but we’ll likely see a slow uptick in that commodity in the coming months.


As always, if you have questions or concerns do not hesitate to contact us. We look forward to being in

touch soon.
Yours Very Sincerely,
CAPSTONE Investment Group, LLC