The market melt-up took a pause last week, with the S&P 500 declining by 0.07 percent to 2,173.60, less than two points below the all-time closing high. This small pullback still left the benchmark index up 6.34 percent 2016-to-date, and more than 200 percent above the March 2009 low, not bad for a 7-year-old bull market. Volatility fell again last week, with major indices trading within one of the narrowest 5-day ranges in years. This was likely due to a combination of profit-taking, i.e. traders selling their winners to lock in gains after the multi-week run-up, and general indecisiveness about where stocks head going forward.
There were numerous headlines for investors to digest last week, including mixed economic data and a handful of important corporate earnings releases. However, the biggest event was the latest decision on monetary policy from the Federal Open Market Committee (FOMC). Indeed, officials on Wednesday announced that the target range for the Federal funds rate would be left unchanged at 0.25 percent to 0.50 percent. It was widely anticipated that the Federal Reserve (Fed) would hold steady with rates in July but the statement released by the committee was arguably a lot more hawkish than expected.
For example, Fed officials said that since their last policy meeting in June, incoming data suggest that “the labor market strengthened and that economic activity has been expanding at a moderate rate.” Focusing on the employment situation in America, officials stressed that “on balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months.” That reflects a big change from earlier FOMC statements which had put an emphasis on “labor underutilization.” Put simply, this seemingly small shift in wording signals that slack in the labor market has become notably less of a concern for officials recently.
Policymakers also stressed that “near-term risks to the economic outlook have diminished,” presumably referring to the heightened uncertainty that immediately followed the Brexit vote and briefly sent stocks across the globe tumbling. On a related note, the real question that most market participants are likely asking themselves right now is whether a similar macro shock will occur in the near-future and provide another excuse for the Fed to delay hiking rates. Such an ancillary factor would have to be significant because the Fed’s comments in the July statement arguably signal that officials believe the U.S. economy is healthy enough to weather another rate increase. Moreover, it seems likely that foreign central banks will remain highly accommodative with their own monetary policy, thus making it easier for officials to proceed with interest rate normalization here in the U.S.
As for when the next hike might actually occur, the December meeting could be too long of a wait if the economy continued to steadily improve throughout the rest of 2016, and some Fed officials would probably be against raising rates during the heart of consumers’ holiday shopping season. The November meeting is doubtful as well because this would essentially be one week before the Presidential election. As a result, most analysts now believe that if a hike does occur this year, it will be at the September policy meeting, and financial markets appear to somewhat agree. Historically, though, September has been one of the worst months for the stock market in terms of performance, which could cause some policymakers to want to hold steady with rates until later.
More importantly, last week’s release of a very disappointing report on second quarter gross domestic product (GDP) growth could lower the odds of a September hike. Additional guidance on the committee’s timetable may be provided by Fed Chair Janet Yellen during her Aug. 26 speech in Jackson Hole, Wyoming. In any event, retirement investors with relatively long time horizons should focus less on trying to predict changes in U.S. monetary policy, and more on building wealth through decades of participation in an employer-sponsored 401(k). Such efforts can be enhanced with dollar-cost averaging, which aims to turn market pullbacks into opportunities, and regularly consulting with a professional financial advisor. As always, we are here to help with any questions you may have.
To recap what we learned about the U.S. economy last week, the positives included that new home sales jumped, and labor bargaining power (a precursor of wage growth) firmed. As for the negatives, mortgage and refinance applications fell, pending home sales grew by less than expected, first-time claims for unemployment benefits rose, consumer sentiment softened, gauges of both national and regional manufacturing activity continued to send mixed signals, demand for American-manufactured durable goods declined, services sector activity cooled, and U.S. GDP in the second quarter of 2016 grew much slower than anticipated. This week the pace of economic data remains elevated, with important reports on manufacturing, wage growth, consumers, and employment scheduled to be released, along with the potentially market-moving July job report from the Bureau of Labor Statistics (BLS) due out on Friday.
What To Watch:
- PMI Manufacturing Index9:45 AM ET
- ISM Mfg Index10:00 AM ET
- Construction Spending10:00 AM ET
- Gallup US Consumer Spending Measure2:00 PM ET
- Motor Vehicle Sales
- Rob Kaplan Speaks 6:15 AM ET
- Personal Income and Outlays8:30 AM ET
- Gallup US ECI8:30 AM ET
- MBA Mortgage Applications7:00 AM ET
- ADP Employment Report8:15 AM ET
- Gallup U.S. Job Creation Index8:30 AM ET
- PMI Services Index9:45 AM ET
- ISM Non-Mfg Index10:00 AM ET
- EIA Petroleum Status Report10:30 AM ET
- Chain Store Sales
- Rob Kaplan Speaks 6:15 AM ET
- Challenger Job-Cut Report7:30 AM ET
- Jobless Claims8:30 AM ET
- Gallup Good Jobs Rate8:30 AM ET
- Bloomberg Consumer Comfort Index9:45 AM ET
- Factory Orders10:00 AM ET
- EIA Natural Gas Report10:30 AM ET
- Employment Situation8:30 AM ET
- International Trade8:30 AM ET
- Baker-Hughes Rig Count1:00 PM ET
- Consumer Credit3:00 PM ET
Sources: Econoday, Bloomberg, Twitter, ZH, Financial Times, Advisor Perspectives, Pension Partners, FRBG, FRBSL
Post author: Charles Couch