The Fed Leaves Rates Unchanged AGAIN and Stocks Bump Higher
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 09/23/16. REIT, Rates and Economic Calendar Data from Bloomberg as of 09/26/16.
The widely anticipated Federal Reserve (“Fed”) meeting ended last Wednesday with the non-earth shattering news that rates would be left unchanged again by the Fed. Stocks rallied around the world in response, which was somewhat surprising given that the probability for a rate hike was quite low. The S&P 500 Index finished the week up 1.2%, International Markets1 gained 3.2%, and Emerging Markets2 posted a 3.7% advance.
In the statement released by the Federal Open Market Committee, acknowledgement was made that since their last meeting in July, the labor market continues to strengthen and economic activity has picked up. Due to inflation continuing to run below their 2% target, rates were left at the current 0.25% – 0.50% target, “for the time being”. This comment, along with Fed Chair Janet Yellen’s comments in her press conference, appear to suggest that a rate hike before the end of the year is highly likely unless there is a shock to the financial markets or economy.
With this latest meeting in the rear view mirror, the Fed will have two more opportunities to raise rates; 1) after their meeting on November 1-2 and 2) after their final meeting of the year on December 13-14. If the Fed does decide to hike rates, the December meeting is the most likely time for the announcement because the meeting coincides with a press conference where Janet Yellen would, presumably, be able to lay out her case for why the change was (or wasn’t) made and level set expectations for the future, potential path of interest rates.
With no U.S. Central Bank activity until November and the third quarter coming to a close, investor attention is likely to shift to 3rd quarter earnings and, of course, the U.S. Presidential election. At this time, it is expected that 3rd quarter earnings for S&P 500 companies will decline by 2.3%. If this happens, it will mark the sixth consecutive quarter of falling earnings. Earnings season unofficially kicks off on October 10th when Alcoa issues their quarterly release.
Just as equities rallied last week when rates were left unchanged, we anticipate a shallow, shorter term sell-off is likely following the next rate hike. After the dust settles, however, we believe that a marginally higher target fed funds rate will be viewed as a vote of confidence in the U.S. economy, remove some degree of monetary policy uncertainty and help fuel economic growth. In order to navigate what is shaping up to be an eventful 4th quarter, we encourage investors to review their portfolios and ensure that the exposure they have to different asset classes helps them to both withstand bouts of volatility and achieve longer term objectives that have been identified through their financial planning process. If you would like to have a portfolio review or financial plan completed, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
1International Markets represented by the MSCI ACW Index. 2Emerging Markets represented by the MSCI EM Index.
Important Information and Disclaimers
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.
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.