Stock Market: U.S. Monetary Policy Takes Center Stage
The markets continued to test investors’ mettle in September; however, the big questions remain the same. Is a bear market about to start, and will the Fed finally allow interest rates to creep out of the close-to-zero range? As September began, market pros and individual investors pondered the possibility that the bull market might be out of steam after a lengthy six and a half year run, and everyone braced for the Fed to announce a much anticipated rate hike – considered by many to be a sure thing in September. Over the following four weeks, all bets were off and volatility was the only sure thing, with major indices rallying in response to good news and then succumbing to losses as traders dithered in response to uncertain global news.
Here’s an overview of factors influencing the stock market and the financial sector:
The Federal Reserve
U.S. investors may have been lulled into thinking the Fed’s decision on when to raise interest rates was all about the recovery of the U.S. economy, but September’s events reminded us that global economic conditions remain a significant consideration. The same events – economic slowdown in China and financial woes in Europe and emerging markets – that roiled the markets were cited by the Fed’s policymakers as the primary factors in the decision to hold off on even a modest rate hike. The huge socioeconomic impact in Europe of the migration of hundreds of thousands of Syrian refugees (the largest displacement of people since World War II) added more uncertainty in the Eurozone. Adding to the mix of global concerns, the fall in commodity prices has hit countries like Brazil, Russia and Indonesia hard; and in the Middle East, oil producers are feeling the pressure of falling crude oil prices. Not everyone agreed with the Fed’s decision to delay “normalizing” interest rates. Some analysts believe that the Fed has provided sufficient advance notice of its intentions to raise rate, stressing that increases will be gradual and that economic planners worldwide have already “priced in” such plans. Others endorse the Fed’s decision in the belief that the time was not right for change as so many emerging markets are reeling from the impact of socioeconomic crises, weak currencies and mounting debt.
Bull or Bear
Despite announcements of its imminent demise, the bull market continued to show sufficient momentum to continue on its path. The news on the job front remains good, and revisions to second quarter growth statistics were positive, with second-quarter GDP revised upward to 3.9 percent from 3.7 percent. These economic indicators suggest that a return to recession in the United States is not imminent. The obvious cloud on the horizon is corporate profit stagnation. Despite a growing economy, U.S. companies are not seeing profit margins increase, which means earnings are expected to shrink.
Many analysts anticipate some continuation of September’s rollercoaster ride into early fall. We ended September with global pressures taking a toll on major indices as investigations into Volkswagen’s diesel engine scandal hit the headlines. Within market sectors, biotechnology took a hit when presidential candidate Hillary Clinton noted that she planned to address price gouging among specialty drug makers.
Despite recent market gyrations, the wisdom of experienced market pros remains consistent. They urge investors to disengage from the drama of intra-day market volatility and focus on the end game.
The commentary above is intended as general commentary and is not a substitute for advice from accounting and investment professionals.