The Fed Maintains Stance amidst Consistent Economic Data
The Federal Open Market Committee (FOMC), as expected, announced Wednesday they would maintain the target fed funds rate at the current level of 0.0 – 0.25%, marking the 55th consecutive meeting without a change in borrowing costs. The consensus view among Wall Street strategists as to when the FOMC will actually lifts rates appears wide spread with many “best guesses” suggesting there is a 50/50 chance of a rate lift in September while some prominent asset managers, such as Jeffrey Gundlach, believe the Fed will not move until 2016.
The Fed cited “moderate” growth in the U.S. economy last Wednesday, the same language used in their June statement, as well as the need for further improvement in the employment situation, before conditions will warrant a rate increase. It appears, based on last week’s GDP and jobless claims numbers that conditions are moving in that direction. While U.S. GDP grew at an annual rate of only 2.3% over the course of Q2 versus the Econoday consensus of 2.9%, the Q1 reading was revised upward from a negative 0.2% to a positive 0.6%, suggesting less volatility in our nation’s economic output. In terms of the employment situation, jobless claims came in below the consensus estimate yet again (a positive in this context) with a reading of 267,000 for the week ended July 25, lowering the 4 week moving average to 274,750. All eyes will now be on this week’s monthly employment situation report from the Bureau of Labor Statistics due Friday for additional insight.
We at Hennion and Walsh continue to believe that the pace of rate increases and terminal level the target rate ultimately reaches will play a greater role in asset pricing going forward than the actual timing of the initial rate hike. With this being said, it is insightful to analyze the returns of growth stocks versus value stocks as investors anticipate a rising rate environment:
Consistent with historical periods of rising interest rates, value stocks, which tend to pay higher dividends than growth stocks while offering lower relative valuations in exchange for less momentum and lower growth in sales and profitability, have underperformed so far in 2015 by an average of over 8%. The question becomes whether this pace of outperformance is sustainable and likely to continue, or if market participants are in store for a reversal. We believe that focusing on longer term investment themes while remaining agile enough to navigate short term volatility is the key to success in this macro- economic driven market. To learn more about the strategies Hennion & Walsh Asset Management is putting in place for clients today or to have your own portfolio reviewed, please speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 7/31/15. Rates and Economic Calendar Data from Bloomberg as of 8/03/15.
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 and Walsh cannot guarantee the accuracy of said information and cannot be held liable.
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