Federal Reserve is Set to Meet As Q2 Earnings are Beating Many Expectations
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 07/22/16. Rates and Economic Calendar Data from Bloomberg as of 07/25/16.
Stocks posted less robust yet still positive results last week amid investor anticipation of upcoming central bank meetings. The S&P 500 Index gained 0.6% and is now up 7.7% for the year as growth stocks have rallied in recent weeks. International developed equity markets* finished the week flat and remain down 1.5% for the year while their emerging equity market counterparts advanced the lead they have on the rest of the world, moving 0.25% higher to arrive at a 11.5% gain since the start of 2016.
As the Federal Open Market Committee (FOMC) is set to begin their two day meeting on Tuesday July 26, second quarter earnings from U.S. companies have been coming in better than expected thus far. As we discussed a few weeks ago, earnings were expected to contract by 5.6% at the start of the Q2 earnings season but now with 25% of companies reporting, this forecast has improved to show a decline of just 3.7%. This improvement has been led by better than expected earnings in the Industrial and Technology sectors. For example, as FactSet points out, Microsoft and Qualcomm, both major players in the Technology sector, have both posted higher than expected earnings while American Airlines and General Electric, two Industrial titans, have also led their respective sector higher.
Not long ago, many had anticipated that the upcoming July FOMC meeting would conclude with the announcement of an additional 0.25% rate hike. However, given the uncertainties created from Brexit among other macroeconomic issues, it is likely to be an uneventful two days. According to the CME Group, there is only a 2.4% probability for a rate hike on Wednesday and only a 42% chance of a rate hike taking place before the end of 2016. Despite concerns of the dovish members of the FOMC, who have time and time again chosen to err on the side of caution, we believe that inflation expectations and the domestic economy can both currently withstand a couple of additional 25bp rate increases in 2016 and would potentially benefit from them. Increases in the Target Federal Funds rate are considered by many to be a vote a confidence in the economy and could lead to additional consumer spending and business investment.
While the Fed weighs tighter monetary policy this week, the Bank of Japan also meets and is expected to announce another round of stimulus. It will be interesting to see the scope of their program and the local market reaction but given the extent of past programs, additional easing has appeared to have a diminishing impact on interest rates, stock prices and the Yen.
Although there are uncertainties in the domestic and global economies, we believe that this secular bull market still has some room to run. We are, however, sensitive to the fact that opportunities are not as easy to come by today as they were five years ago and suggest investors take a careful, disciplined approach to managing current and any future investments. If you would like to learn about how we are helping clients deploy new capital in the markets, or to have your current investments reviewed, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
*International developed equity markets are represented by the MSCI EAFE Index; emerging equity markets are represented by the MSCI Emerging Market Index; both are measured in US dollars, as of 7/22/2016.
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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.
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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.
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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 REITSs that primarily own and operate income-producing real estate.