Fed Now Likely to Hike Rates in March
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 3/3/17. REIT, Rates and Economic Calendar Data from Bloomberg as of 3/7/17.
U.S. Large cap stocks once again saw a week of gains with the S&P 500 Index adding 0.7% to take its year-to-date return up to 6.9%. On the Mid and Small cap front, the Russell Midcap Index gained 0.2% while the Russell 2000 Index fished the week flat. For the year, the Russell Midcap Index is now up 5.7% while the Russell 2000 Index continues to lag behind, up 2.9% in 2017. Internationally, developed markets, as measured by the MSCI EAFE Index, gained 0.5% for the week while the MSCI Emerging Market Index fell 1.3%. Despite last week’s loss, emerging market stocks continue to lead major indexes this year, up 8.1% thus far in 2017.
As recently as the start of last week, the probability for a rate hike at the Federal Open Market Committee’s (FOMC’s) March meeting stood at about 50%. Following strong inflation data last week, as well as several speeches from members of the FOMC, the probability is now nearly 90% according to CBOE’s FedWatch Tool. The Fed’s preferred measure of inflation, the Personal Consumption Expenditure Price Index (PCE), rose to an annual rate of 1.9% in January, up 0.3% from the month prior and represented its strongest reading since April 2012. In this regard, Federal Reserve (Fed) Chair Janet Yellen spoke on Friday at the Executive’s Club of Chicago and remarked that during their next meeting, “The committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.” This was received as a strong indication that, absent a disappointing jobs number this upcoming Friday, the FOMC was ready and willing to raise rates at their next meeting.
Should the Fed decide to move rates higher in March, the door will be open for up to four potential, total hikes in 2017. A tightening monetary environment in the U.S. will be in contrast to much of the developed world where many government bonds are trading with negative interest rates. Investors should understand the risks and opportunities that a rising rate environment presents. Certain sectors of the stock market historically have reacted very differently to higher interest rates. We strongly encourage investors to take this opportunity to review their exposure to different sectors, either through their ownership of individual stocks, or through mutual funds or exchanged-traded funds (ETFs). To have a complimentary review completed on your current investments, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
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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.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
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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.
Investors cannot directly purchase any index.
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.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
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 REITSs that primarily own and operate income-producing real estate.