Spring Awakening

Undeterred by the possibility of a June interest rate hike, Wall Street continued its upward trend, buoyed by higher oil prices and the belief that investors were reconciled to interest rates increases – coming perhaps as early as June. During the last week before the Memorial Day holiday, Standard and Poor’s 500 index gained 2 percent in its strongest run-up since March, with much of the impetus generated by the energy sector. Here are some of the major topics attracting attention by investment experts.

• According to industry pros watching the Federal Reserve for hints as to upcoming policies, traders are giving about a 38 percent chance for a June rate hike and 45 percent likelihood for July. In March, the Fed revised its plans to raise official rates in increments of 25 base points four times (or 100 base points total) over the course of this year. The changes mean that the Fed’s policymakers now are proposing scaling back rate hikes to a total increase of 50 base points in two official rate increases. Global economic and financial issues, rather than domestic economic performance, appear to be behind the Fed’s changes.
• If individual investors have accepted that higher interest rates are coming soon, it also suggests that investors are placing more faith in the economy’s steady modest growth. Interest rate hikes, which would in turn be passed on to consumer and business creditors, would help financial institutions and banks.
• The energy sector has seen a rebound in recent weeks, as oil prices edged upward to $50 per barrel. Although consumers benefit from lower prices at the pump for the Memorial Holiday weekend, bargain gas prices won’t be around for much longer. Declining oil supplies have helped almost double the price per barrel of oil since February, and now we are seeing the effect at the pumps, with regular gasoline prices at $2 per gallon or more. Economists had expected lower gas prices to give the economy a general boost, but it appears that consumers have pocketed much of their extra cash. The decline in the energy sector has proved to be more of a drag on the national economy than many had predicted, with the slowdown bleeding into the manufacturing sector and hurting manufacturers of oil exploration equipment. The sector’s recent resurgence has brought good news to states like Texas and Oklahoma, where the decline in exploration and production had cost many well-paying jobs.
• Although the full extent of the fallout in the energy sector has yet to be reckoned, the markets are entering the summer months on an upward trajectory. Worldwide stocks saw steep gains in May and emerging market stocks finally rose, marking the end to a long slump in weekly declines that began last August.
• Uncertainty surrounding the UK’s June referendum on whether to pull out of the European Union (EU) could impede stocks in both Europe and the United States for the next few weeks.

As always, the commentary above is intended as a general overview. It is not intended to replace the advice of investment and tax professionals.

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