A highly anticipated Federal Reserve Open Market Committee (“FOMC”) meeting occurs September 16 -17.
The Federal Reserve controls the three tools of monetary policy–open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.
Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.
We can expect this week’s FOMC to move markets and create a moderate amount of intra-day volatility because the FOMC’s announcement on interest rates will be followed by a press conference with Chairperson Yellen. This provides the opportunity for her to give us intriguing comments and statements of opinion.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is a B (favorable). Gasoline prices continue to drop. Imports have become cheaper due to the strength of the U.S. dollar. Both trends put more money in the pockets of Americans coming into the all-important Holiday shopping season.
THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices. The next big milestone is that Fed meeting Sept. 16-17
BUSINESS PROFITABILITY: This factor’s grade is a C (average).
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 6 due to continued signs of a slowdown in China. These risks deserve our ongoing attention.
Last week, U.S. Stocks and Foreign Stocks increased but Bonds declined. During the last 12 months, BONDS outperformed STOCKS.
Returns through 9-11-2015
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.1
.7
2.6
1.7
3.2
4.5
US Stocks-Standard & Poor’s 500
2.1
-3.3
-.2
13.4
14.4
6.9
Foreign Stocks- MS EAFE Developed Countries
2.1
-2.0
-8.1
6.7
5.6
3.4
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week, Laurie will discuss: “How your attitudes affect your financial choices and results.”
Laurie will take your calls on these topics and other inquiries this week. This show will be broadcast at the regular time. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville and Macungie area – or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
A rocky week on Wall Street ended solidly in the black, as the Dow Jones industrials recorded their largest weekly gain in nearly six months. But investors still sounded rattled as they await the Federal Reserve’s decision this week about whether to raise interest rates.
“The overarching theme is that volatility will be here to stay—intraday, intraweek—until we get the answers to two questions,” says Lori Heinel, chief portfolio strategist at State Street Global Advisors. “Where is global growth headed? And what is the Fed going to do?”
Investors cheered news of continued gains in the job market. The number of job openings in the U.S. grew to a new record of 5.75 million last week, according to the Department of Labor, which has been tracking openings since 2000. China cut its expected growth rate to 7.3% from 7.4%, but vowed to introduce more stimulus measures. In general the news out of China seemed incrementally better, or at least not appreciably worse, and that seemed to lift investors, said Keith Lerner, chief market strategist at SunTrust Private Wealth Management.
The Dow jumped 331 points, or 2.1%, last week, to 16,433.09. The Standard & Poor’s 500 rose 40 points to 1961.05. The Nasdaq Composite index rose 138 points, or 3%, to 4822.34. Still, there’s little indication the gains will stick. The S&P 500 has flip-flopped from gains to losses and back again for 10 straight weeks. For the Dow, it has been nine weeks.
Indeed, a pessimistic streak runs through the market. Investors pulled $16.2 billion out of equity funds in the week ended Sept. 9, Lipper data show. A Merrill Lynch analysis estimates that outflows have totaled $46 billion over four weeks. A survey by Investors Intelligence showed more investors were bearish than bullish for the first time since October 2011—although some interpret that as a contrary indicator.
Lerner says that the markets are still in the process of bottoming after the panicky selloff in late August. These kinds of corrections tend to result in herky-jerky trading for weeks, if not months. But stocks eventually bounce back. Lerner says there are six other times in history when markets fell 10% or more in four days. Every single time, the market rose within a year.
In the near term, the Fed’s actions at its Sept. 16-17 meeting should determine trading patterns. The Street is clearly flummoxed. About half of the 78 economists surveyed by Bloomberg predicted the Fed will lift rates, but traders seem less convinced. Fed-funds futures indicate a 28% chance of a rate increase.
If the Fed chooses to raise its interest-rate target, the market would have a “knee-jerk negative reaction,” Heinel predicts.
A change in rates could unsettle global markets and help tip them into recession.
