The market melt-up continued last week, with the S&P 500 rising by another 0.05 percent. This fractional gain still left the benchmark index up 6.85 percent 2016-to-date, and more than 200 percent above the March 2009 low, not bad for a 7-year-old bull market. However, the CBOE’s VIX volatility index, often referred to as “investors’ fear gauge,” posted its first weekly increase since June. Although the uptick in the VIX was small, it was likely a reflection of investors’ rising level of uncertainty about where equities head going forward from these record levels. One of the key factors behind traders’ elevated indecisiveness is U.S. monetary policy. Indeed, there are several things that can help officials at the Federal Reserve (Fed) justify a decision to proceed with interest rate normalization here in America, e.g. continued domestic payrolls growth and highly accommodative central bankers overseas. Inflationary pressures, though, remain muted, and mixed signals on manufacturing, consumers, productivity and labor turnover could all give policymakers an excuse to hold steady with rates.
Nearly three-quarters (71 percent) of economists surveyed this month by the Wall Street Journal said that they believe the next hike will occur at the December Federal Open Market Committee (FOMC) meeting. That is a significant increase from the July survey when only 7.8 percent of respondents anticipated a December rate increase. Not too long ago September was also considered a likely month for another hike but now only 11 percent of surveyed economists expect officials to adjust monetary policy next month. A big reason for this shift is the disappointing report on second quarter U.S. gross domestic product (GDP) growth released late last month, and the string of subsequent data releases which lowered the expectations for an upward revision to the Q2 GDP print, as well as the likelihood of a sharp rebound in growth this quarter. Unsurprisingly, surveyed economists now expect GDP growth of just 1.8 percent over the course of 2016, down from an estimate of 2.0 percent in July and 2.5 percent at the beginning of the year. Market participants have even greater doubts about another rate increase occurring this year, with CME data last week suggesting an implied probability of no hike at all in 2016 of 61.5 percent. In any event, retirement investors with relatively long time horizons should focus less on trying to predict near-term changes in U.S. monetary policy, and more on building wealth through long-term 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 mortgage and refinance applications jumped, the number of job openings in America lifted, small business owner optimism rose, consumer sentiment firmed, wholesale inflation pressures cooled, and businesses’ stock-to-sales ratios improved (continued inventory drawdowns). As for the negatives, cross-border inflation pressures picked up, nonfarm productivity unexpectedly fell for the third quarter in a row, and core retail sales contracted for the first time since January. This week the pace of economic data remains slow but there are still several important reports on manufacturing, housing, employment, and inflation scheduled to be released, along with a few speeches on monetary policy from Fed officials as well as the potentially market-moving minutes from the last FOMC meeting.
What To Watch:
- Consumer Price Index8:30 AM ET
- Housing Starts8:30 AM ET
- Industrial Production9:15 AM ET
- E-Commerce Retail Sales10:00 AM ET
- Dennis Lockhart Speaks 12:30 PM ET
- MBA Mortgage Applications7:00 AM ET
- Atlanta Fed Business Inflation Expectations10:00 AM ET
- EIA Petroleum Status Report10:30 AM ET
- James Bullard Speaks 1:00 PM ET
- FOMC Minutes2:00 PM ET
- Jobless Claims8:30 AM ET
- Philadelphia Fed Business Outlook Survey8:30 AM ET
- Bloomberg Consumer Comfort Index9:45 AM ET
- Leading Indicators10:00 AM ET
- EIA Natural Gas Report10:30 AM ET
- 5-Yr TIPS Auction 1:00 PM ET
- John Williams Speaks 4:00 PM ET
- Baker-Hughes Rig Count1:00 PM ET
Sources: Econoday, Bloomberg, Twitter, Wall Street Journal, ZH, Advisor Perspectives, FRBSL
Post author: Charles Couch