The results from the latest Federal Open Market Committee (FOMC) meeting proved of little concern during the week as market participants had overwhelmingly priced-in no action from the Federal Reserve. We learned that interest rates will remain at current levels for the foreseeable future and that the Fed’s stance on the reasoning for higher interest rates remains well intact. Comments from voting members indicated that the possibility of two interest rate hikes in 2017 is plausible assuming domestic economic growth does not falter. We would argue that judging domestic growth in such a scenario is highly subjective. Although it’s hard to make an argument that the Fed sees 2% gross domestic product (GDP) growth as strong growth, there are other metrics that are likely granted more attribution to the decision making process. The Fed, unfortunately, does not objectively discuss those metrics but the labor market has been a notable discussion topic among voting members.
The reason for the labor market’s importance is because its effect has been highly noticeable. January nonfarm payrolls increased by a surprising 227,000 relative to the expectation of around 180,000, and the labor force participation rate inched higher to 62.9% from its previous base of 62.7%. The upside announcement in jobs was preliminarily attributed to the near-term boost in seasonal employment as well as the strong short-term trend we’ve experienced in manufacturing. The ISM Manufacturing index, which tracks whether the sector is expanding, has seen a booming upside since the low in December 2015. Its current fast paced expansionary trend is one that has not been seen in quite some time. Although positive, we must take into consideration the low base of where the trend commenced and the fact that such a trend cannot continue indefinitely. Not only do we anticipate a near-term cooling period in the data, but we believe a potential stabilization may be possible given the promised fiscal policy measures by the Trump administration. It’s also important to note that the ISM non-manufacturing based index is also exhibiting strong expansionary data. In other economic data points, it bares significance to quickly focus on the housing market data released last week. Pending home sales for December indicated that 2016, as a whole, remained flat on a year-over-year basis for pending home sales. This is not a negative in our view but it’s also not something that should be viewed with excessive optimism. We’re significantly more optimistic on new home sales and the data for that sector of the housing market proved stronger in 2016, despite the fear of higher interest rates. The 30 year average national mortgage rate currently stands at 4.02%, up from its multi-decade low of 3.32% it reached in 2016.
Global equity markets remained relatively neutral during the week with the Standard & Poor’s (S&P) 400 Index, which tracks medium size companies, gaining the most domestically (+0.61%). International developed equities, as depicted by the MSCI EAFE, closed flat for the week and were likely influenced by monetary policy decisions in Japan and China. To the surprise of many economists, the PBOC (People’s Bank of China), increased short-term interest rates in early 2017 and has sent a strong message to the world on their willingness to deleverage their banking system. In our view, the action remains ambiguous to aggregate financial market conditions in China.
Investment advice offered through Hefty Wealth Partners, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
Investment Policy Committee