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Was Fed meeting prelude to rate hike?

Weekly market commentary
Courtesy of Ken Armstrong, Shane Fleury and Steve Shanley of Northwesthern Mutual Wealth Management — Vail Valley

The lead-up to and aftermath of last week’s Federal Reserve meeting, along with the zigzagging price of oil, sent stocks on yet another wild ride. Both finished on the upswing, and the NASDAQ climbed to a 15-year peak, just 23 points from breaking the all-time high that has long seemed unattainable.

The Fed met last week and, as widely expected, it dropped the word “patient” from its post-meeting statement, which many analysts saw as the prelude to a rate hike as early as June.

In her post-meeting press conference, Chairwoman Janet Yellen went out of her way to say that too much shouldn’t be made of the wordsmithing: “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient,” she said. “The change does not necessarily mean that an increase will occur in June, though we cannot rule that out.”

The Fed lowered its forecasts for growth, inflation and where it expected its benchmark rate to be at the end of 2015, 2016 and 2017. The forecast showed that 15 of 17 committee members think the Fed will raise its benchmark rate in 2015 and anticipate two increases to about 0.75 percent, still very low from a historical standpoint. The fact that the Fed said it would still be, well, patient was enough to send the market soaring and drive 10-year bond yields back below 2 percent.

Oil’s up and downs

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In another volatile week, United States crude dipped to a six-year low of $44 a barrel on Monday, the same day that the Organization of Petroleum Exporting Countries (OPEC) issued a report indicating it was unlikely to curtail production anytime soon. Even so, the price of a barrel jumped back 4 percent March 20 to end the week up 2 percent, taking the major stock indexes along for the ride.

Tsipras gets rebuffed

As debts come due with the coffers all but empty, Greece’s Prime Minister Alexis Tsipras headed to Brussels to importune eurozone’s leaders for more latitude, but he ran into a brick wall as German’s Chancellor Angela Merkel and France’s President François Hollande, among others, made it clear that Greece had no wiggle room. It would only get the next round of bailout money if it lived up to the agreement of Feb. 20 in which it promised to follow through on its austerity steps.

China wins a tug of war

Despite intense diplomatic efforts, the U.S. has been routed in its drive to keep allies from signing on as charter members of the Asian Infrastructure Investment Bank, China’s rival to the World Bank and the Asian Development Bank, which it sees as controlled by the West. Two weeks ago it was Great Britain breaking ranks, and last week Germany, France and Italy followed suit. Australia and South Korea are expected to be next, and even China’s territorial rival Japan is reportedly considering membership. The New York Times noted that the decisions were “a stinging rebuke to Washington from some of its closest allies.”

Deflation redux in Japan?

While leaving his unprecedented stimulus spending intact, the Bank of Japan’s Governor Haruhiko Kuroda warned that consumer prices had stopped rising “for the time being” and might turn “slightly negative.” This means that deflation, the bane of Japan for more than a decade, is returning, mostly because of lower oil prices.

The budget battle begins

Though they were only the opening salvos of what promises to be a long and acrimonious battle, the proposed budgets for both the Senate and House had one thing in common: the repeal of the president’s Affordable Care Act. Even the GOP leaders crafting the budget have different priorities, especially when it comes to military spending. As Senator Lindsey Graham (R, South Carolina) put it, “This is war within the Republican Party. You can shade it any way you want, but this is war.” The proposals came out as the Congressional Budget Office forecast a deficit of $486 billion for this fiscal year, 2.7 percent of GDP, and $455 billion next year, or 2.4 percent of GDP.

Housing’s freeze and possible thaw

As yet another sign of winter’s wrath, the Commerce Department said that housing starts plummeted 17 percent in February to an annualized rate of 897,000, with starts dropping 56.5 percent in the snow-battered Northeast (compared to a dip of 2.5 percent in the South). The government also said that new home sales fell 0.2 percent in January to an annual rate of 481,000. Even so, the expectation is that, with still-low mortgage rates and the spring thaw, starts and sales will rebound. That may explain why building permits were up 3 percent in February to an annual rate of 1.09 million.

In other economic news, the National Association of Home Builders/Wells Fargo index of builder sentiment fell for the third month in a row in February, dropping to 53. The Labor Department said that first-time jobless claims rose 1,000 to 291,000, while the four-week average increased 2,250 to 304,750. The Conference Board reported that its index of leading indicators was up 0.2 percent. Plus, the government said that industrial production rose 0.1 percent in February, but manufacturing output was down for the third straight month, off 0.2 percent.

A look ahead

In what should be a quieter week in the wake of the Fed’s meeting, releases will include updates on new and existing home sales, the Consumer Price Index, capital and durable goods orders, and Markit’s manufacturing, composite and services indexes. In addition, the government will release its final revision of fourth-quarter GDP, which first came in at 2.6 percent and was revised down to 2.2 percent (this week’s estimate is 2.4 percent).

This commentary was prepared specifically for your wealth management advisor by Northwestern Mutual Wealth Management Company.

The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.

All investments carry some level of risk including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. No investment strategy can guarantee a profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. High yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

The Dow Jones Industrial Average Index is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Standard and Poor’s 500 Index (S&P 500) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Standard & Poor’s offers sector indices on the S&P 500 based upon the Global Industry Classification Standard (GICS®). This standard is jointly maintained by Standard & Poor’s and MSCI. Each stock is classified into one of 10 sectors, 24 industry groups, 67 industries and 147 sub-industries according to their largest source of revenue. Standard & Poor’s and MSCI jointly determine all classifications. The 10 sectors are Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities.

The NASDAQ Composite Index® Stocks traded on the NASDAQ stock market are usually the smaller, more volatile corporations and include many start-up companies.

NASDAQ – National Association of Security Dealers Automated Quotations. The NASDAQ is a computer-operated system owned by the NASD that provides dealers with price quotations for over-the-counter stocks.

The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.


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