During the holiday shortened trading week stocks in the US managed to avoid any major bouts of volatility and the S&P 500 posted a decent 2.1% gain. The Dow Jones Industrial Average matched the performance of the S&P 500 exactly, while the NASDAQ Composite was up 3%. US equities have been in a see-saw pattern since early July, as all three major indices have been alternating between gains and losses on a weekly basis. Year to date the S&P 500 remains in negative territory and is down 3.3% on a total return basis. The VIX index, commonly known as the market’s “fear gauge” closed on Friday at a three week low of 23.
Stocks in Europe and Asia also saw gains this week. Shares in Japan had their largest single day gain since 2008 on Wednesday as the NIKKEI 225 index was up almost 8% after a plan to reduce corporate tax rates was announced. Weak economic data for Japan on the following day tempered much of those gains, and a weakening yen kept the weekly gain for U.S. investors at about 1.5%. China returned to trading after a two day holiday last week and logged a gain of about 1% on the Shanghai Composite while the Hong Kong Hang Seng Index surged 3.3%. European equities in the form of the STOXX 600 had a modest gain of about 0.5%, but were brought negative by a strengthening euro.
US Treasury prices declined slightly this week as yields on the 10 and 30 year securities rose 6 basis points to 2.19% and 2.95%, respectively. Despite falling to a low of 1.64% in January and rising to a high of 2.48% in June, the 10 year note closed on Friday just 2 basis points away from where it started the year.
The relative calm in markets worldwide this week came as the FOMC prepares for a two day meeting next week. This will be the first meeting in almost ten years in which the federal funds rate stands a decent chance of being raised. However whether or not that will actually happen is truly anyone’s guess as there is absolutely no consensus on the matter.
After seven years of ZIRP, the U.S. economy is doing okay and decent economic data along with a strong labor market (the unemployment rate dropped to 5.0% last month) both make a reasonable case for liftoff from zero. However, the other half of the Fed’s dual mandate (i.e. inflation) is nowhere to be found and given the roller coaster ride in the stock market over the past few weeks, many economists are calling on Yellen and the rest of the FOMC to wait just a bit longer. As of Friday’s close, fed funds futures put the chance of a hike at about 28%, while about half of the economists surveyed expect an increase. If you remember back to the Jackson Hole summit from a couple weeks ago, many of the global central bankers expressed a desire for the fed to simply get the inevitable over with and begin raising rates. At this point though it really is a toss-up as to whether or not the fed funds rate goes up next week. If the FOMC does move it will in all likelihood end up being a one-and-done event, with the next increase coming sometime well in 2016.
The economic data out this week was a bit of a mixed bag which further complicates the Fed’s upcoming rate decision. The jobs market remained strong with record openings and lower than forecast jobless claims, however consumer sentiment slipped to a nine month low. There is also some important data points set to be released next week before the Fed’s meeting, including readings on retail sales, CPI, and multiple housing market indicators. The Fed will surely take these things into consideration as it struggles to make its decision.
In emerging market news this week, S&P cut Brazil’s credit rating to junk status (BB+) as the largest economy in Latin America struggles to lift itself out of a recession. The country has been hit hard by falling commodity prices and political corruption which has stymied opportunities for growth. With Russia also facing a recession and a slowdown in China, the emerging markets have been running short on engines for growth. India remains a brighter spot in an otherwise darkening outlook, as the IMF forecasts it to grow by 7.5% in 2015.
For those of you who have an iPhone 6 (and there’s a lot you as over 180 million have been sold) your phone is now obsolete, as Apple introduced a new line of products this week. The new phones look similar to their predecessors, but have faster processers, better cameras, and something called 3D Touch which allows the device to react differently depending on the how hard the screen is pressed. In addition to the new phones, Apple also refreshed its iPad line and upgraded its Apple TV product.
Have a great weekend everyone and enjoy what is left of summer. It may be raining, but at least it’s not snow – yet!
Senior Investment Analyst