Markets, Economy

Weekly Kickstart (08/22/2016-08/26/2016)

8/22/16 8:00 AM

iStock_000000499785_Small-1Stocks edged lower last week, with the S&P 500 declining by 0.01 percent to 2,183.87. This fractional loss 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, trading volumes remain muted because most institutional participants prefer to go on vacation in August. This partially explains why equities continue to chop around near record levels without any meaningful push higher or lower. More importantly, the low volume means that retail investors should avoid reading too deeply into recent price action. Looking ahead, a new report from Bank of America Merrill Lynch found that the single biggest worry for surveyed fund managers is a disintegration of the European Union, followed by a renewed China currency devaluation and rising U.S. inflation. Despite these concerns, many fund managers reported being “less worried now about a drop in U.S. equities than they were in July,” and fewer managers said that they are “taking out protection against a sharp fall in equity markets over the next three months.”


One thing that likely did add to investors’ uncertainty last week was Wednesday’s release of the minutes from the latest Federal Open Market Committee (FOMC) meeting. Indeed, it is not surprising that many traders are having a difficult time estimating the Federal Reserve’s (Fed’s) timetable for interest rate normalization because the minutes from the July meeting revealed that policymakers themselves are largely split on when another hike will be appropriate. Some committee members, for instance, believed that a rate increase is very much a possibility as early as September, while others preferred to wait until next year or even later. What is clear, is that Fed officials are not in any rush to hike because “members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity,” according to the minutes.


Put simply, officials will not commit to moving on rates until a stronger consensus can be reached about the overall outlook for economic growth, job creation, and inflation in America. Immediately following the release of the July minutes, the market-implied probability of a rate hike occurring before yearend dropped slightly below 50 percent (a coin flip). Additional clarity on the Fed’s timetable may be provided by Fed Chair Janet Yellen in her speech this Friday at the annual economic symposium in Jackson Hole, Wyoming. However, 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 homebuilder sentiment firmed, housing starts rose, industrial production increased, capacity utilization improved, e-commerce retail sales lifted, and a measure of consumer “comfort” rebounded. As for the negatives, mortgage and refinance applications fell, building permits declined, gauges of U.S. manufacturing activity continued to send mixed signals, and healthcare-related services expenses remained a major driver of recent consumer inflation pressures. This week the pace of economic data picks up slightly, with several important reports on manufacturing, housing, employment, consumers, and services sector activity scheduled to be released. The first revision to the government’s estimate of second quarter U.S. gross domestic product (GDP) growth is also due out this week but many analysts have doubts that there will be any significant improvement.

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Sources: Econoday, Bloomberg, Twitter, Fact Set, ZH, Advisor Perspectives, WSJ, Reuters, Pension Partners, ThinkAdvisor, BofAML, FRBG, FRBSL

Post author: Charles Couch