Markets, Economy

Weekly Kickstart (05/23/2016-05/27/2016)

5/23/16 8:00 AM

iStock_000000499785_Small-1Stocks edged higher last week, with the S&P 500 gaining 0.28 percent. This was the first week-over-week increase in a month and and it left the benchmark index up 0.41 percent 2016-to-date, and 3.68 percent below the record high hit in May of last year. Volatility picked up during the past five trading sessions and a major factor behind this was the release of the minutes from most recent Federal Open Market Committee (FOMC) meeting. Indeed, the April announcement on monetary policy was already considered somewhat hawkish when compared to other statements from the Fed this year but the minutes from last month’s meeting revealed that many market participants might have been greatly underestimating the likelihood of additional interest rate hikes occurring in 2016. For example, a majority of Fed officials said that they believe it would likely be appropriate to raise the federal funds rate in June if “incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the committee’s 2 percent objective.” Put simply, the Fed reiterated that monetary policy will remain data dependent, therefore implying that the economic reports released over the next few weeks could be quite telling in whether or not officials will hike in June.

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Some Fed members even expressed concerns that the market is currently underpricing the committee’s willingness to hike at next month’s policy meeting. All of this has been supported by more recent comments from Fed officials, such as Federal Reserve Bank of Richmond president Jeffrey Lacker who on Thursday said that he sees a “strong” case for raising rates in June. Lacker even said that Brexit risk by itself is not great enough to warrant a delay in domestic interest rate normalization. Traders clearly got the message that Fed officials were trying to convey because real rates jumped to the highest level since March immediately following the release of the FOMC minutes, and the market implied probability of a June rate hike more than doubled from 12 percent to 32 percent. A rising rates environment definitely has the potential to be a near-term headwind for equities but savvy retirement investors are not overly concerned because they understand that persistent and long-term participation in the market, combined with dollar-cost averaging, can help them not only benefit from rallies but also turn drawdowns into opportunities. As always, we are here to help with any questions you may have.

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To recap what we learned about the economy last week, the positives included that online retail sales grew, refinance applications picked up, housing starts lifted, building permits increased, homebuilder sentiment firmed, existing home sales expanded by more than expected, industrial production rebounded, capacity utilization rose, and the number of Americans making first-time claims for unemployment benefits declined. As for the negatives, mortgage applications edged lower, regional manufacturing activity contracted, and consumer inflation pressures picked up. This week the pace of economic data slows down but there are still several important reports on manufacturing, housing, foreign trade, the services sector, and consumers scheduled to be released, along with the first revision to the government’s estimate of first quarter U.S. gross domestic product (GDP) growth due out this Friday.

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What To Watch:

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Sources: Econoday, Bloomberg, Twitter, ZH, BofAML, Advisor Perspectives, et al

Post author: Charles Couch