Markets, Economy

Weekly Kickstart (09/26/2016-09/30/2016)

9/26/16 8:00 AM

iStock_000000499785_Small-1Stocks continued to rebound last week, with the S&P 500 rising by 1.19 percent to 2,164.69. This solid push higher helped lift the benchmark index’s 2016-to-date gain to 5.91 percent, and left the S&P 500 just 1.16 percent below the all-time closing high hit in August. There were numerous headlines driving last week’s price action but the biggest event was without a doubt 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 opt to hold steady with rates in September but strongly hint at a higher likelihood of hikes down the road. In one sense the Fed delivered on this expectation for a “hawkish hold” because officials in the statement stressed that “the Committee judges that the case for an increase in the Federal Funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”

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However, those objectives are to support further improvement in labor market conditions and see a return to 2 percent inflation. Based on the Fed’s updated economic projections, the outlooks for both the unemployment rate (U-3) and core inflation (PCE) from now through 2018 actually deteriorated slightly versus the June policy meeting. Moreover, the central bank’s updated “dot plot”, which displays the Committee’s outlook for the path of interest rates, implies only two rate hikes occurring next year, down from June’s median projection of three. For many investors all of this means that even if officials do hike this year, the subsequent pace of interest rate normalization should be quite accommodative (slow). That likely explains why both equities and bonds rallied sharply following the release of the FOMC statement, and signals that the Fed continues to lose credibility despite a recent uptick in hawkish commentary from several officials. For retirement investors with relatively long time horizons, though, the focus should be less on trying to predict near-term changes in U.S. monetary policy, and more on building wealth through consistent participation in an employer-sponsored 401(k) plan. Such efforts can be enhanced with dollar-cost averaging and regularly consulting with a professional financial advisor. As always, we are here to help with any questions you may have.

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To recap what we learned about the U.S. economy last week, the positives included that homebuilder sentiment jumped, a gauge of regional manufacturing activity rebounded, and the number of Americans making first-time claims for unemployment benefits fell to a 5-month low. As for the negatives, mortgage and refinance applications declined, housing starts slid, building permits edged lower, existing home sales growth cooled, housing inflation picked up, and a measure of consumer “comfort” deteriorated. This week the pace of economic data increases substantially, with lots of important reports on housing, manufacturing, services sector activity, consumers, and inflation scheduled to be released, along with the final update to the government’s official estimate of second quarter U.S. gross domestic product (GDP) growth due out this Thursday.

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What To Watch:

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Sources: Econoday, Bloomberg, WSJ, CNBC, Twitter, FRBG, Advisor Perspectives

Post author: Charles Couch

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