Eyes on the FED

Highlights of This Week’s Update:

1. Stocks and gold moved lower last week while interest rates rose.
2. Economic signals remained mixed, with disappointing payroll numbers in August.
3. All eyes on the Fed this week in anticipation of any possible change in stance after their two day meeting ending on Wednesday.
4. Our outlook continues to be cautious.  Could we could be seeing the start of a market decline?

Read on for more details…………………………………………………………………

The Markets:

Last week the financial markets tried to discount a possible change in the Federal Reserve’s stance when they complete their two day meeting on Wednesday.  The Dow Jones Industrial Average dropped almost 1%, bringing the year-to-date return to 2.5% through last Friday.  The Standard & Poor’s 500 stock index also dropped 1.1% for the week.  Interest rates rose, with the yield on the 10 year U.S. Treasury moving to 2.62% for an increase of .16 on the week, while gold prices dropped to $1,241.50 per ounce. (MarketWatch, U.S. Treasury, CNBC)

 August statistical payroll noise and a Fed meeting

Early September’s action in Europe overshadowed the monthly labor report, which typically gets plenty of attention from economists, analysts, investors, and the Federal Reserve.  September nonfarm payrolls rose by a net 142,000 (BLS), missing forecasts (Bloomberg) and snapping a 6-month streak above 200,000 (BLS).

Any slowdown in job creation is something that would be exceedingly important to policy makers at the Federal Reserve, who are trying to lay the groundwork for the first rate hike of the recovery.  Recall that low interest rates are the Fed’s biggest weapon in its monetary arsenal in that the Fed is hoping to encourage faster spending among businesses and consumers by boosting the incentive to borrow.

If job growth really is slowing, it’s a signal that the summer acceleration in activity is just one of the many false economic dawns in what can only be described as a lackluster economic recovery.

Where August’s final number will land is difficult to forecast, but the weight of the evidence points to possibly a more robust reading than the initial report. The problem is, we’ll get two more revisions: one out in early October and the final in early November.

The Fed takes the stage

The disappointing August report didn’t modestly complicate the math at the Fed, where some officials are taking a suspicious stance to the recent pick-up in the economy.

Nonetheless, this week’s two-day Fed meeting is on the radar.  The minority contingent at the Fed is pushing for language in the Fed’s press release that could be interpreted by investors as more aggressive, i.e., a sooner rather than later rate hike.

But the Fed’s delicate task – how does it adjust the language without creating a repeat of 2013’s “taper tantrum,” when bond yields temporarily spiked. If we see any new language that would be viewed as a precursor of a rate hike, Fed Chief Janet Yellen’s quarterly press conference that follows would give her ample opportunity to elaborate on any changes.  We will most likely be in for a volatile week in the financial markets overall, from both stock and bonds until a clearer picture from the Fed is in place.

Our Outlook:

We have not changed our stance that a possible stock market decline of some type could occur in the weeks ahead.  Our stock exposure is still less than normal for all risk levels and individual company stocks remain our focus vs. stock/equity mutual funds.  The FED meets this week, and some volatility in both stocks and interest rates should be expected, at least in the short term.  We will continue to monitor on a regular basis and keep you informed.

We hope you all have a great week and please don’t hesitate to call if you have any questions or concerns.  We appreciate the privilege of serving each 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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