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Modest Gains for Stocks as Fed Prepares to Raise Rates

Stocks meandered about in their recent trading range this week. Equities got a boost from a dovish Fed on Wednesday and Thursday which offset jitters from earlier in the week over the never ending Greece debacle. As of the close on Friday, the S&P 500 managed a gain of 0.8% this week and is up 3.5% for 2015.

While the S&P 500 has remained near but off recent all-time highs, the NASDAQ Composite reached a new closing record on Thursday at 5,132. Recall that the tech heavy index first surpassed its 15+ year old .com bubble peak of 5,048 back in March of this year. While it gave back some in Friday’s trade, the index still posted a gain of 1.3% for the week and it is up 8.7% year to date.

The big event this week was the conclusion of the two day FOMC meeting on Wednesday. While the Fed kept interest rates unchanged as expected, the anticipation over the timing of the first rate hike in almost a decade continues to build. During the press conference following the rate announcement Janet Yellen tried to dissuade markets from placing too much importance on the timing of the initial rate hike saying, “what should matter to market participants is the entire trajectory, the entire expected trajectory of policy.”

Yellen reiterated the Fed’s long standing sentiment that any rate changes will be data dependent and continued to suggest that inflation will remain at a low level for quite some time. The Chair noted the strength in the dollar and its impact on growth here at home but commented that “in spite of the appreciation of the dollar the committee obviously thinks that the economy is likely to do well enough to likely call for some tightening later this year.”

The Fed expects a moderate pace of GDP growth as the jobs market continues to strengthen and low energy prices provide a potential boost to consumers. Despite gaining an average of 236k jobs per month over the last half year, Yellen still sees some cyclical weakness in the labor market as the participation rate remains below trend and the number of underemployed workers remains high. Bottom line from the meeting is that the Fed wants a tighter labor market and firmer inflation numbers before raising rates. While they are not quite there yet, a rate hike sometime this year remains the likely outcome.

European markets as measured by the Stoxx 600 lost about a percent this week when priced in euros. Fears over Greece are starting to escalate once again as a debt payment to the IMF is due at month end. It should not be surprising that Greece does not have the cash for the payment, and needs additional bailout funds to make good on those prior. The ECB, EU, and IMF remain adamant that Greece implement greater reforms which include the usual prescriptions for profligate countries including raising taxes and cutting spending. Sadly we have been here before with Greece, so expect the tension to escalate and a just-in-time deal at the 11th hour.

Last week I talked about how the index provider MSCI declined to include Chinese A shares in their main emerging markets index. The decision was due in part to liquidity concerns and restrictions placed on foreign buyers. This week offered a good example as to the temperamental nature that limited markets can exhibit, as both the Shanghai and Shenzhen Composites tumbled roughly 13% in just five days. The mainland equity markets have been on a recent tear that has been fueled by individual buyers equipped with margin accounts. Despite the significant fall, the Shanghai index remains up 39% this year while Shenzhen has gained 94%.

And finally this week, the race for the 2016 Republican presidential nomination took two historic but perhaps also inevitable turns this week as both Jeb Bush and Donald Trump announced their candidacies. The son of 41 and brother of 43 enters as a probable frontrunner and a viable candidate who could very well challenge Hillary Clinton for the White House. The well-coiffed real estate developer on the other hand enters a crowded field that currently stands at no less than 12 different candidates. Perhaps to differentiate himself from the pack his announcement speech included such gems as “I’m really rich” and “I beat China all the time.” A Clinton, a Bush, and an eccentric billionaire running for president – history doesn’t repeat but it sure does rhyme.

Have a great weekend everyone. The solstice is this Sunday. Get out and enjoy the 19 hours and 22 minutes of sunshine in Anchorage. Or all 24 hours for our friends up in Barrow!

 

Nicholas Case
Senior Investment Analyst

 

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