While the Market was surprised by the FOMC’s decision to maintain its current course, there is a price to be paid for that action.  Part of the reason that the FOMC delayed tapering had to do with fiscal uncertainty over the next month or so, i.e. the budget deadline and the debt ceiling that should be breached some time mid October. The Market celebrated the decision by the FOMC on Wednesday; however Friday gave way to the more morbid notion that turmoil lay ahead which caused the Federal Reserve’s decision.

A failure to complete a continuing resolution for the budget would leave hundreds of thousands of government workers temporarily unemployed and dampen consumption within our economy. Congress has presented a proposal that is contingent upon the de-funding of the Affordable Care Act (Obamacare).  Should the senate reject this proposal it will leave very little time for a continuing resolution to be acted upon.  Alternately, we may see the GOP use the Debt ceiling as an avenue to de-fund Obamacare; should that be the case, we could see volatility similar to 2011.  Both of these scenarios have implications of short-term volatility (should they be driven to the brink), however the key is short-term. The Debt Ceiling debate in August, 2011 caused major volatility followed by a very impactful rally.  Patient investors were handsomely rewarded for riding the wave.

Another interesting event last week was the unique correlation between equity markets, fixed income markets, and gold futures.  They all rose in tandem on Wednesday.  While these asset classes will typically have inverse relationships, sometimes the mix of news that impacts them can cause this type of correlation:

• Equities: Stocks rose in response to the unexpected news that the FOMC was going to keep its accommodative monetary policy as is (at least for the next month and a half).
• Fixed Income: When the FOMC decided to stay the course, it signaled stability in interest rates for the short- term and led to a buying rally that actually drove rates slightly down.
• Gold Futures: Gold rises in a weakening Dollar environment.  Rising rates equal a strengthening U.S. liberia . economy and Dollar, while maintaining a lower rate policy unexpectedly (as the FOMC did) spells a weaker that anticipated economy and Dollar.

All and all equities rose last week, but a word of caution in that the equity rally was induced by an FOMC that stated it sees headwinds in the near future.  That’s why this was the week that wasn’t…

Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services.  Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.

If you would like an in-depth analysis of your current positions and allocation, please feel free to call Jason Roque at 719-313-7536 to schedule an appointment.

Sources: mfs.com, oppenheimerfunds.com, and morningstar.com

* Financial Action, Inc. is a Registered Investment Advisor.