Stocks, Commodities Continue Their Slide-Eyes on the FED

Highlights of this Week’s Update:

1. Be sure to reserve your spot at our upcoming Social Security educational sessions.
2. Major U.S. stock indices ended lower last week, continuing their sideways movement in 2015.
3. Interest rates were flat, while oil and gold fell for the week ending last Friday.
4. Economic news still mixed.
5. FED’s first rate hike on the horizon, but when?
6. How stocks reacted to the last 4 upward cycles of Fed rate hikes.

READ ON FOR FURTHER DETAILS……………………………………..

Social Security Educational Workshops Scheduled:

Just a reminder that we have scheduled special sessions covering Social Security benefits and planning.  We will go over options in claiming benefits, when to file, what benefits are available under various circumstances and other valuable information.  We encourage you to attend and feel free to bring a guest(s) that you feel may benefit from this important information.  Sessions will be held in our conference room, so seating is limited.  Call today to be sure you reserve your spot at one of the following offerings:

Wednesday, August 26^th:       3:00-4:30PM

Friday, August 28^th:                10:30AM-12:00 Noon

Wednesday, September 2^nd:    10:30AM-12:00 Noon

The Markets:

Last week the major U.S. stock indices dropped over 1%, with the Dow off 1.79% and the Standard & Poor’s 500 stock index down 1.25%.  For 2015, the Dow has declined 2.52% and the S&P 500 now up just .91% for the year.  (MarketWatch)

Earlier this year we had anticipated the possibility of a “sideways” market and as you can see by the chart below for the Dow Jones Industrial Average, that is pretty much what we have experienced so far through Friday’s close.

Interest rates eased slightly, while oil and gold continued to fall. West Texas Intermediate Crude closed Friday at $43.75 per barrel, and gold ended at $1,093.50 per ounce. (CNBC)  Mortgage rates were little changed, with the national average for a 30 year fixed mortgage ended Friday at 3.90%, and the 15 year rate stood at 3.02% (Bankrate.com) 

The Economy and the FED

Following the release of the July employment report last Friday the following headline appeared: Jobs Data Does Little to Quell Rate Hike Fears. Though a 215,000 rise in nonfarm payrolls (U.S. Bureau of Labor Statistics) isn’t all that impressive, it isn’t all that bad either. While the labor market still hasn’t healed from the Great Recession, there’s been progress – see Figure below.

Would stocks have roared ahead last Friday on a very weak payroll number, which might have diminished the prospects for a near-term rate increase by the Fed? Or would markets have reacted violently amid worries about economic weakness? We’ll never know, but we believe economic weakness is a bigger threat right now to stocks than economic growth, which supports corporate profits.

Part of the uncertainty we are experiencing right now in stocks is tied to the growing possibility the Fed will start hiking interest rates next month. Global growth anxieties, China, and the latest drop in commodity prices (Bloomberg) are also in play.

While we may get volatility, the start of a rate hike cycle doesn’t have to spell the end of the bull market. Look at the table below, which highlights the last four upward cycles by the Federal Reserve.

	Fed funds rate hikes	6 months post hike*	1 year post hike*
1994	3.00 – 6.00%	-4.0%	-0.4%
1997	5.25 – 5.50	19.4	39.8
1999	4.75 – 6.50	8.3	6.7
2004	1.00 – 5.25	6.8	5.6

Source: St. Louis Federal Reserve *Returns on the S&P 500 Index

While the table is simply a historical guide, note that stocks were off just modestly in the aggressive series of increases that began in 1994, with the fed funds rate rising from 3.0-6.0% in a little over one year.

The more gradual approach over a two year period, which began in 2004, saw stocks post gains over the six and 12 month periods after the first rise in the fed funds rate. Of course, every cycle has its peculiarities, and today the Fed isn’t responding to a strong economy.

Whenever the first hike occurs, it will be the upward trajectory that is more important. In other words, will we get a second rate hike in December (assuming the first occurs in September), and where will the fed funds rate be a year or two years from now? Most expect any series of rate increases to be gradual.  Time will tell.

We wish each of you a great week ahead and be sure to call today to schedule your mid-year review if you have not yet done so this quarter.  We appreciate the privilege to serve all of you and look forward to working together in the years to come.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

 

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¹ The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly.  Past performance does not guarantee future results.

³ The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly.  Past performance does not guarantee future results.

⁵ New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.

⁶ London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results.