Stocks rode a small carnival ride yesterday after the U.S. Department of Commerce announced that gross domestic product (GDP) grew at an annualized 4 percent rate during the second quarter, better than economists had expected, and after the Fed wrapped up its regularly scheduled meeting.
Today, however, the market was down decisively, and stocks finished July in the red. While here in the U.S. the Federal Reserve’s decision and release of its policy statement yesterday eased concerns over its interest rate policies, enough reasons remain to be worried about the health of overseas economies. Read more about What's Behind the Pause 07-31-14
The markets are forward-looking, as we all know, and share prices are based on the future earning power of the underlying stocks. This begs the following question: could the relatively strong earnings season and the ongoing easy-monetary policies (the Fed is staying the course and the ECB has signaled that it is prepared to do more) outweigh the profit dangers that now stem from the likely increase of sanctions on Russia?
So far, the answer is yes. Stocks rallied on Tuesday and again on Wednesday, to a new record on the S&P 500, as geopolitics took the passenger’s seat beside earnings. Meanwhile, Treasuries also rallied. On Tuesday and Wednesday of this week, the yield on the benchmark 10-year T-note was near a 13-month low—which also means the prices of U.S. Treasuries were nearing a 13-month high. Interestingly, amid the high-quality rally, junk bonds sold off. Read more about Looking Forward 07-24-14
Geopolitics aside, the market keeps its antennae tuned to the Federal Reserve wavelength. This week, Federal Reserve Chair Janet Yellen appeared before Congress with the Semiannual Monetary Policy Report and reiterated the central bank’s concern over “significant slack” in the labor markets and low inflation.
The bottom line: the U.S. economy needs continued prompting and the Federal Reserve plans to provide support from retention of the longstanding ultra-easy monetary policy. Read more about The Fed and Corporate Actions in Focus 07-17-14
The minutes of the latest FOMC meeting, held in June, were released yesterday. Typically, investors peruse the minutes for clues on the Fed policy; this time was no exception.
In terms of interest rates, the minutes presented nothing new, suggesting a timeline close to one widely expected by the market. Short-term rates, as was discussed at the meeting, could continue at their current, record-low levels, for some time, until both targets on inflation and unemployment are reached (i.e. after inflation reaches 2 percent and we also see maximum employment).
The market action after the minutes’ release speaks volumes: low interest rates are a positive for risky assets, and a positive for the economy. Also, since the Fed will not move to raise rates immediately after the goals are reached, having some leeway, the market can also breathe easier. Read more about More Clues in the Minute(s) 07-10-14
The end of the latest quarter was marked by continued market strength. Of course, six quarters in a row, the market kept moving higher, and now it has within sights 2,000 for the S&P and 17,000- plus for the Dow Industrials. While pricey, stocks remain attractive, with monetary policy very dovish and economy improving.
Just today, the European Central Bank (ECB) in its meeting kept the euro zone interest rate at its own record-low 0.15 percent. A deposit rate is also unchanged, at negative 0.1 percent.
QE for Europe is still on the table, although, just like last month, the ECB didn’t deem the eurozone economy weak enough to warrant quantitative easing. If prospects for deflation increase, according to the ECB president Mario Draghi, the ECB would consider QE. Most currently, inflation in the Eurozone clocked in at 0.5 percent. Read more about All the Fireworks and Parties 07-03-14