Stocks Move Higher on Fed Statement and Oil12-24-2014 |
Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 12/23/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 12/19/14
Stocks Move Higher on Fed Statement and Oil
Last week, stocks (as measured by the S&P 500) see-sawed losing a cumulative 1.5% in Monday and Tuesday’s trading before reversing to earn a cumulative 4.9% Wednesday through Friday to finish the week up 12.8% for the year. The increase in stock returns coincided with the FOMC’s final meeting of 2014 during which they assured market participants the committee would be “patient” when considering raising interest rates and kept the “considerable time” language within the body of their statement (full text here.1) We expect the Fed to raise interest rates at some point during the first half of 2015 but what should have greater implications is the level to which the Fed will allow interest rates to rise. The chart below shows the disparity of interest rate projections within the FOMC and summarizes member’s projections for the Fed Funds Rate at the end of 2015:
2015 Fed Funds Rate Projections Fed Funds Rate # of Projections 0.00-0.25% 2 0.25-0.50% 0 0.50-0.75% 2 0.75-1.00% 4 1.00-1.25% 3 1.25-1.50% 0 1.50-1.75% 2 1.75-2.00% 4
Source- Federal Reserve http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20141217.pdf
The market, however, continues to believe that the Fed is more hawkish than they are letting on. Futures are currently pricing the Fed Funds Rate during December 2015 to average 0.66%2. This may be a reflection of lower inflation expectations since the path of interest rates in 2015 will likely be very dependent on future PCE (Personal Consumption Expenditures) data. The central tendency of the Fed’s expectation for inflation is 1.5 – 1.8%. Should inflation trend lower than this expectation, the Fed may (and in our opinion, will likely) take a more gradual path to raising rates.
In addition to “Santa Yellen’s” gift to investors long U.S. Stocks, volatility in the oil market has begun to subside. While we expect oil to remain somewhat of an uncertainty heading into 2015, we are encouraged to see that the volatility (as measured by standard deviation) has decreased to approximately 5.5% since the start of December. To put this perspective, volatility (again measured by standard deviation) since the start of the quarter has been around 10.7%3*. While we understand that the statistical significance of the recent decrease in volatility isn’t on par with the entire quarter’s worth of data, we believe that reduced uncertainty and positive short term prospects of lower oil prices are one of the factors helping the market to climb higher.
The beginning of each year is a perfect time to ensure that your portfolio is in line with both your objectives and your expectations. If you have not yet reviewed your accounts performance in 2014, your current investment objectives, or your expectations for the New Year, we strongly suggest you speak with your Hennion and Walsh financial advisor or a member of the Hennion and Walsh’s Portfolio Management Team. We at Hennion and Walsh wish you and your family a happy and health holiday season and prosperous New Year!
*Volatility data is as of 12/15/14
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