Economic Data Impresses and the Federal Reserve Pivots on Rate Hiking Path
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 02/01/19. Rates and Economic Calendar Data from Bloomberg as of 02/04/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets continued to bounce back from 2018 lows, as nearly every notable index produced positive returns last week. In the U.S., the S&P 500 Index pressed ahead to a level of 2,707, representing a gain of 1.62%, while the Russell Midcap Index gained 2.09% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 1.31%. On the international equities front, developed markets moved 0.95% higher, while emerging markets gained 1.74%. Finally, the 10-year U.S. Treasury yield finished the week at 2.70%.
Last week, in a highly anticipated announcement, the Federal Reserve decided to keep the federal funds target rate unchanged in a range of 2.25% – 2.50%. The Fed’s decision to leave rates unchanged following this particular meeting was largely expected, but most did not expect the Fed to strike such an overwhelmingly dovish tone in post-meeting communications. Since Jerome “Jay” Powell has taken the helm as the Chairman of the Federal Reserve, the Fed has repeatedly stated that they would remain data-dependent with regards to the pace at which they increase benchmark interest rates. In other words, if a handful of economic variables used to judge the health of the U.S. economy met a certain threshold, the Federal Reserve would be forced to increase interest rates, potentially disregarding exogenous factors (i.e., enhanced geopolitical & economic risk). However, last week’s dovish message seemingly reversed course.
Following last week’s rate decision, communications from the Federal Reserve explicitly stated that the Fed plans to remain “patient” and embrace a “wait-and-see” approach in regards to raising interest rates and reiterated that they are not necessarily on preset course in terms of shrinking the size of their balance sheet. More importantly, they went on to essentially say that the philosophy of the Fed wasn’t changing because of economic weakness in the U.S., but instead because of global economic and geopolitical concerns. Consider January U.S. non-farm payrolls, which increased by more than double analyst expectations as 304,000 new jobs were created, as evidence of this change in philosophy. In the past, an economic report this impressive likely would have forced the Federal Reserve to accelerate monetary tightening, rather than shift to a more accommodative stance.
While investors should find solace in the Federal Reserve’s assessment of the U.S. economy, they should also find angst in the confluence of risks currently facing the global economy. During times of uncertainty and increased risk, proper portfolio diversification can be critical. As a result, we encourage investors to revisit the diversification that may, or may not, be in place within their existing portfolios. If you would like to learn more about how we are helping clients invest dynamically and consistently with their own goals, time-frame and tolerance for risk, please do not hesitate to speak with your Hennion & Walsh Financial Adviser.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
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DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.