Upside Risk to Inflation May Force Fed’s Hand Earlier than Many Currently Expect03-29-2016 |
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 03/24/16. Rates and Economic Calendar Data from Bloomberg as of 03/28/16.
U.S. stocks* broke a five week winning streak, falling 0.2% during the holiday shortened 4 day trading period last week. Following the tragic attacks in Brussels in addition to mixed economic data that was reported, markets exhibited range-bound trading, not rising or falling more than 1% during any one day. The third estimate for quarter four 2015 GDP, released Friday while markets were closed, came in better than expected by rising 1.4%. This was better than the 1.0% gain reported during the second estimate, which in turn was an improvement from the initial release which showed a 0.7% gain. The upside to GDP was due in part to stronger than expected consumer spending, the largest component of the U.S. economy at present.
With persistent improvement in employment, rising wages, and increasing oil prices*, Federal Reserve members are now pointing to upside risk in terms of inflation expectations. Five Fed Bank Presidents spoke last week and four of the five suggested that if the economy continues to evolve as expected, additional rate hikes may not be far off. Jeffrey Lacker (Richmond Fed President), Dennis Lockhart (Atlanta Fed President), Patrick Harker (Philadelphia Fed President), and James Bullard (St. Louis Fed President and the only voting member of this group) all suggested that rising inflation indicators and continued improvement in the economy will force the Fed’s hand earlier this year than markets currently expect. Charles Evans (Chicago Fed President), perhaps the most dovish of the twelve Bank Presidents, believes a “wait and see” approach may be best to ensure that when inflation does rise above the 2% goal, it is not just temporary.
According to the CME Group, there is only an 8% probability of a rate hike at the next meeting of the Federal Open Market Committee (FOMC), which is set for April 27. Given the uncertainties surrounding economic growth, inflation, and monetary policy, there are a number of opportunities for stock market investors to be caught off guard in 2016. In light of this environment, we are suggesting that investors consider the lessons that they may have learned in January and February about their own risk tolerance levels to ensure their investment strategy is capable of reaching their long term goals without a level of risk that may tempt them to make abrupt changes to their allocations to stocks, bonds and cash. To request a free portfolio review, please speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
*U.S. Stocks are represented by the S&P 500 Index. Oil Prices are represented by WTI Crude.
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