Investment Insights: Fed up with the Fed
This weekly report presents insights from our Global Investment Management team.
U.S. stock markets seem to be wavering as earnings results flow in and geopolitical risks come back into focus despite a dovish turn from the Fed that renewed investor enthusiasm.
The S&P 500 has climbed over 20% so far this year, but has stalled around the 3,000 level over the past month.
The 10-year Treasury also seems to be in wait-and-see mode, holding right at 2% as investors attempt to understand the growing uncertainty over the future of the global economy and monetary policy.
The Federal Reserve has seemed to share those same economic doubts. After alluding to multiple interest rate hikes late last year, the Fed began backing off talk of any hikes, and now may potentially make multiple cuts by year’s end. Fed Chair Jerome Powell seems to be supporting the high-pressure labor market – as unemployment nears a 50-year low – since inflation doesn’t appear to be moving upward anytime soon.
Powell has said it before and he’ll say it again: the Fed’s goal is to sustain the economic expansion and, as widely expected, the Fed cut rates by 0.25% today – the first reduction in over a decade. Prior to the meeting, the fed funds futures market pointed to a 100% chance of a rate cut this meeting and a high chance of another in September with no further cuts for the rest of the year. Former Fed Chair Janet Yellen recently endorsed a quarter-point cut, but noted she doesn’t expect this to be the beginning of a major easing cycle. Critics of the cut are making their voices heard and investors will be looking for more clarity on the path for rates going forward.
Financial markets continue to be heavily influenced by a very active Fed with earnings, usually a key driver for stocks, playing second fiddle. After expectations for shrinking earnings, companies are adhering to their age-old custom of soundly beating Wall Street estimates. According to Bloomberg data, 303 of the S&P 500’s companies have reported and earnings have grown 3.55% with the largest profit increases from the communication services and health care sectors. While we are more than halfway through the current season, there is still time enough for results to disappoint, or continue to outperform.
Our team has adjusted our strategies in recent months to become more defensive, and we continue to view the market in a cautious light. Geopolitics remain a key risk given fresh tensions arising between the U.S. and China as they reconvene at the negotiating table, and the win for U.K. Prime Minister Boris Johnson which has increased the probability of a no-deal Brexit. We believe accommodative monetary policy could provide more upside to stocks, but as Yellen has said, that may not be the Fed’s plan.
For direct access to investment insights, market updates, and perspectives on financial topics from Bank of the West and BNP Paribas leaders, download the Voice of Wealth app, available at the Apple iTunes and Google Play stores.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
Diversification and asset allocation do not ensure a profit or guarantee against loss.