Week in review
Global equity markets climbed early in the week on rumor (taken as a given) that the US Federal Reserve (FED) would raise its benchmark interest rates. The FED has telegraphed its intentions to increase rates in hopes to ease the economy into ‘normalizing’ interest rates. US equity indexes moved sharply higher Wednesday as the FED delivered a .25% increase to its benchmark interest rate and made note of considerable improvement in the labor market which made the FOMC committee reasonably confident of inflation moving up over the medium term to its objective of 2%.
The FED has painted itself into a very tight corner on the topic of interest rates as the original intent of the zero interest rate policy (ZIRP) was for emergency economic purposes. Items we are considering regarding the rate rise are:
• Economic progress has been made since 2008 but the rate of change has been slow. Throughout this FED’s history rate increases have come to cool the economy. The current economy is not in need of cooling.
• History shows that the FED has never just raised rates once and left rates. There is a slope to the rate increases. The slope is likely going to be the factor that impacts the economy more than the rate increases themselves.
• Now that we are eight years into ZIRP, and the global economy is now slowing, the FED is faced with moving rates up while many nations are lowering rates and stimulating their economies.
• The US economy has struggled to achieve the 2% inflation target with ZIRP in place for eight years and many other economic stimulus efforts increasing rates into ‘normal’ territory may impact rate sensitive parts of the economy.
• The rate increase will likely help the US dollar to continue to strengthen which is good for making imports cheaper for US consumers but can have a negative impact on US exports.
So, while the rate increase is a step toward ‘normalizing’ rates, the FED took a long time to make the first increase because the economy has not shown obvious signs of sustained growth. Therefore, we see this increase more as the FED trying to give itself economic wiggle room versus increasing rates due to economic strength. As always, we continue to monitor global markets and will look for signs of stress or opportunities.
Getting Technical with Market Charts
In this section we present charts of the S&P 500 Stock Index and the US Bond Market Index relative to their 50 day (blue line) and 200 day (red line) moving averages. In addition, we have added the blue shaded area which represents the recent trading channel. The 50 and 200 day moving averages are widely followed market trend indicators that provide a general picture of the health of the broad indexes.
Chart 1 – S&P 500
Chart 2 – Aggregate Bonds
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Disclaimer – Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. The Standard and Poors 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Contact your investment professional to discuss suitability for your particular circumstances. This article does not constitute an offer of sales of any securities. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results. Lighthouse Financial Advisors, Inc., dba Lighthouse Wealth Management, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.