Markets Turn Jittery – Weekly Update for August 14, 2017

Last week, rising tension between North Korea and the U.S. rattled the world’s markets. As the two countries traded tough words, concerns escalated and markets reacted emotionally to the news. Though stress is building internationally, we remain committed to focusing on the market fundamentals that drive long-term value.

We recently published a special update outlining the details of how markets have reacted to other significant geopolitical events. History shows that markets can fall in the wake of alarming news but do recover, given time. We encourage you read through the post and talk to us if you have questions or concerns. You can find the special update HERE.

Amidst the pressure last week, volatility returned to markets—and all three major U.S. market indexes turned south. The Dow dropped 1.06%, the S&P 500 fell 1.43%, and the NASDAQ declined 1.50%. Global markets also reacted as the MSCI EAFE lost 1.59% for the week.

Though international developments dominated headlines, economic news important to markets and investors continued to roll out. The data reflects a solid economy, but some possible headwinds are on the horizon. Here are the highlights:

  • Impressive Corporate Earnings: Q2 corporate earnings reports both domestically and internationally were impressive. Reported corporate earnings in the U.S. increased an average of over 10% for the second quarter in a row—their first time doing so since 2011.
  • Low Inflation: The consumer price index, which measures changes to the average price of specific goods and services, rose only 0.1% in July. Expectations for a 0.2% increase failed to materialize as housing and travel costs, wireless services, and auto sales all slumped in July. At 1.7%, year-over-year inflation remains below the Federal Reserve’s targeted 2% growth rate. Continued low inflation may cause the Fed to rethink its plans to raise interest rates.
  • Rising Demand for Labor: Labor markets continue to be a key economic driver as evidenced by sharply rising job openings. June’s job openings jumped to 6.2 million from 5.7 million in May. Year-over-year, job openings climbed an impressive 11.3%. Moreover, jobless claims remain at historic lows.
  • High U.S. Household Debt: The current outstanding consumer debt of $12.7 trillion is now higher than the previous record reached in 2008. This debt load could wind up being a drag on consumer spending and the economy as a whole.

What Is Ahead

Tense geopolitical headlines may continue, but there will be plenty of market news, too. Retail, manufacturing, and housing data will come out this week, and Friday’s August consumer sentiment numbers will be of interest. Though the markets may move with emotions, economic fundamentals should continue to be the base for long-term value.

No matter what questions you may have, we always welcome you to reach out and contact us. We are here to help.

ECONOMIC CALENDAR

Tuesday: Retail Sales, Import and Export Prices, Housing Market Index, Business Inventories
Wednesday: Housing Starts
Thursday: Jobless Claims, Industrial Production
Friday: Consumer Sentiment

Markets March Ahead – Weekly Update for July 31, 2017

Last week, markets marched ahead within a busy reporting week. The Dow rose 1.16% to close Friday on another new high. The S&P 500 notched a record high during the week, despite closing the week slightly down 0.02%. Meanwhile, the NASDAQ slipped 0.20%, and the MSCI EAFE rose 0.21%.

Generally strong corporate earnings reports helped markets continue to hit highs. The majority of companies that have posted Q2 earnings so far have beaten their estimates. Those earnings performances helped push financials, materials, and energy stocks up by over 1% early in the week. Health care companies also posted substantial earnings as S&P 500 health care stocks have risen 16% this year. Health insurer stocks have also increased by 22%.

Additionally, Q2 Gross Domestic Product (GDP), consumer confidence, exports, housing, and oil all reported noteworthy developments.

A Rundown of Last Week’s Developments

  • Solid GDP Performance: For the second quarter, GDP came in at a 6% annualized rate—one of the strongest quarters in the last 2 years. GDP growth was based on robust consumer spending for durable and nondurable goods. In addition, business investment hit a solid 5.2% annualized increase for the quarter.
  • Healthy Consumer Confidence: Consumer confidence remains quite high with the index rising in July almost 4 points to 121.1. The index beat the optimistic estimate of 118 and has jumped approximately 20 points since last November’s election, staying near March’s 17-year high of 124.9. In addition, the consumer sentiment index moved up modestly the last two weeks of July to end at 93.4.
  • Decent Export and Import Numbers: Food products and capital goods helped exports rise by 1.4% in June. Further, wholesale and retail inventories both jumped 0.6%. Imports, however, fell 0.4% on lower industrial supplies and consumer goods.
  • Mixed Home Sales: A tight labor market and low mortgages continue to spur demand for housing. In June, new home sales recorded a strong 610,000 annualized rate. Meanwhile, existing home sales dropped 1.8% in June to an annualized rate of 5.5 million, which was lower than anticipated. Existing home prices, however, were up 6.5% year-over-year, with a median price of $263,800.
  • Better Oil Prices: Oil prices rose this week, hitting the highest weekly percentage gains this year. Prices strengthened with news of shrinking U.S. crude and gas inventories, along with foreign efforts to reduce output.

What Lies Ahead

The Fed observed in its meeting last week that risks to the economic outlook seem stable. In its analysis of the economy, the Fed pointed to moderate economic growth, a sturdy employment environment, and positive business investments. As expected, the Fed did not increase interest rates but suggested that unwinding its $4.5 trillion balance sheet could begin as early as September.

This week will again offer key economic data to help provide a better understanding of market performance in June and early indicators for July. As always, we are here to answer any questions you may have about our economy and your financial life.

ECONOMIC CALENDAR

Monday: Pending Home Sales Index
Tuesday: Motor Vehicle Sales, Personal Income and Outlays, PMI Manufacturing Index, Construction Spending
Wednesday: ADP Employment Report
Thursday: Factory Orders
Friday: Employment Situation, International Trade

 

[xvii] http://wsj-us.econoday.com/byshoweventarticle.asp?fid=482414&cust=wsj-us&year=2017&lid=0&prev=/byweek.asp#top

Q2 Coming into Focus – Weekly Update for July 17, 2017

Last Friday, stocks closed on more record highs. The S&P 500 rose 1.41% and the Dow climbed 1.04%—both closing at new peaks. The NASDAQ reported a 2.58% gain and the MSCI EAFE posted a 2.38% increase. Despite continuing headlines from Washington, the markets remain productive and strong. New Q2 numbers also rolled in last week, giving us a clearer picture of what happened from April through June.

Q2 Coming Into Focus

Over the second quarter, the S&P 500 rose 2.57%, the Dow gained 3.32%, and the NASDAQ jumped 3.87%. Meanwhile, the MSCI EAFE improved by 5.0%. Analysts are now predicting that Q2 Gross Domestic Product (GDP) will grow to 2.4%—stronger than Q1’s soft 1.4% increase.

While we wait for more numbers and reports, here are some highlights so far:

  • Corporate Earnings: Corporate Earnings should remain strong for Q2, with an expected S&P 500 earnings growth of 6.5%. As of July 14, only 6% of S&P 500 companies have reported earnings.
  • Core Consumer Pricing: Core Consumer Pricing, which measures the price of consumer goods excluding food and energy, remained at 60-year historically low June’s numbers increased by only 0.1%—the third month in a row for low rates.
  • Retail Sales: Retail sales were soft, declining unexpectedly by 0.2% following May’s 0.1% drop and April’s 0.3% rise.
  • Labor Market: Employers hired at a record increase of 8.3% in May, filling 5.5 million jobs. Consequently, job openings fell in May to 5.7 million from April’s strong 6.0 million. The strong labor market further reflected in June’s low unemployment rate of 4.4%.

On the international front, global economic growth is set to post a predicted 3.0% increase for Q2. Emerging and advanced economies both should record positive results based on strong global trade growth and favorable economic indicators. Both China and Japan are expected to post strong economic growth.

News From Last Week and Looking Ahead

For Q3 and Q4, the economy should continue to produce strong job data and decent housing markets—along with growing investments in businesses. For the year, the economy is expected to expand at an estimated 2.2% in 2017. With that said, consumer sentiment fell to 93.1 in July—much lower than expected. Because consumer spending makes up more than two-thirds of the economy, the markets will continue to follow consumer attitudes and spending. Given current global economic trends, some analysts expect the global economy to grow by 3.0% for 2017.

Finally, Fed Chair Janet Yellen testified before Congress last week. She confirmed that the Fed’s reduction in its $4.5 trillion balance sheet—known as “tapering”—will start later this year. She also suggested that interest rate hikes might continue for a couple of more years. With inflation hovering at 1.4%, however, the Fed may be losing confidence in reaching its targeted goal of an annual 2% increase. Meanwhile, The Bank of Canada has followed the Fed’s lead by raising its interest rates 25 basis points to 0.75%—its first raise since 2010.

As always, we are here to help you navigate the often-complex economic environment. Contact us if you have any questions about how this information may impact your financial life. 

ECONOMIC CALENDAR

Monday: Empire State Manufacturing Survey
Tuesday: Import and Export Prices, Housing Market Index
Wednesday: Housing Starts
Thursday: Jobless Claims, Philadelphia Fed Business Survey Outlook, Fed Balance Sheet

 

July 2017 Market Update Video

June 30 marked the final trading session not only of the month, but also the first half of 2017. It’s a period marked by strong stock market returns and exceptionally low volatility, although volatility returned the last week of June. We also saw markets alternating between gains and losses.

In this video, Adam will talk about some of the economic headlines that influenced markets in June, and give you some insight into what they could mean for you as an investor.

As always, if you have any questions or concerns about your portfolio, or if you would like a second opinion, give us a call at (419) 425-2400, or send us an email. Thank you for watching!!

Mixed Markets Continue – Weekly Update for June 19, 2017

Markets remained mixed last week as the Dow closed at another record high, while the NASDAQ fell and the S&P 500 held steady. By Friday, the Dow gained 0.52%, the NASDAQ fell -0.92%, and the S&P 500 gained a slight 0.05%. Meanwhile, the MSCI EAFE remained virtually unchanged from last week, down only -0.002%.

In other markets, oil closed at $44.74 a barrel, down 2.4% on the week—its fourth week of declines. Overall, European equity markets remained steady while most Asian markets recorded modest gains at week’s end.

The Fed Increases Interest Rates

As expected, the Fed announced last week that it raised the short-term interest rate target by 25 basis points to a range between 1.00 and 1.25%. This was the third interest rate hike by the Fed in the last six months. The Fed also announced its intention to reduce the $4.5 trillion balance sheet by selling off assets acquired in the wake of the 2008 financial crisis. The Fed currently plans to sell approximately $10 billion monthly starting later this year.

Further, last Wednesday, Federal Reserve Chair Janet Yellen reported on the Fed’s belief that the current weak inflation numbers are temporary. However, the Fed’s plan to continue raising interest rates going forward and sell off its assets may change if the economy does not gain momentum in Q3 and Q4. To date, the economic data continues to point to a Q2 Gross Domestic Product (GDP) that may be weaker than previously anticipated.

Soft Economic Data Continues

Consumer Sentiment Dampens: The preliminary consumer sentiment index for June dropped to 94.5, the lowest since last November. The index fell from May’s reported 97.1.

Retail Sales Soften: Retail sales had their largest monthly drop since January 2016.  Sales declined 0.3% in May against predictions of a 0.1% gain over April. The report includes a variety of disappointing numbers:

  • 1% decrease for restaurants
  • 2% dip for automotive vehicles
  • 0% fall for department stores

Business Inventories Drop: In April, business inventories dropped 0.2% from the prior month, which was 0.1% under the consensus. Further, retail inventories also dropped 0.2%, and wholesale inventories abruptly fell 0.5% for the month.

CPI Falls: The Consumer Price Index fell 0.13% in May. The disappointing numbers mark another decline—the 2nd in 3 months—as economists had expected a 0.2% increase from April’s number.

Housing Weakens: In May, housing starts dropped 5.5% from April and permits fell 4.9%. The trend continues the decline from Q1 and could signal another negative quarter.

Market Details on the Horizon

More housing news will influence the week ahead as the existing home sales report comes out on Wednesday and the new home sales report comes out on Friday. Markets will continue to watch the fundamentals, including consumer spending, which makes up 69% of GDP. So far this year, consumer spending has been soft with vehicle sales and restaurant sales sliding downward most months.

As always, we are here to talk should you have any questions about the markets or your own financial objectives. Our goal is to help you understand your financial life with clarity and confidence.

ECONOMIC CALENDAR

Wednesday: Existing Home Sales
Thursday: Jobless Claims
Friday: PMI Composite Flash, New Home Sales

Mixed Worldwide Markets – Weekly Update for June 12, 2017

Markets were mixed last week with leading tech stocks falling dramatically as some investors pulled profits. The NASDAQ took the biggest hit, finishing 1.55% down on the week—its worst week of the year. Meanwhile, the Dow rose 0.31% for the week, notching another record close on Friday. The S&P 500 fell 0.30%, and the MSCI EAFE closed the week down 1.22%.

The S&P tech sector dropped 3.3% on Friday; however, it remained up 18% for the year. Major tech stocks account for almost 13% of the total number of stocks in the S&P 500, while comprising nearly 40% of the S&P 500 increase for the year.

Internationally, Asian markets were mixed while European markets closed the week generally higher. The European equities markets took last week’s UK election in stride, though the pound dropped in response to the Conservatives losing their majority.

Domestically, monthly job openings exceeded 6 million in April. Hiring, however, has slowed to only 5 million per month, suggesting workers’ skills may not match job needs. Moreover, the economy continues to show signs of softening.

Indications of a Softer Economy

  • Wholesale and Retail Inventories Down: Revised wholesale inventories shrunk 0.5% in April, the largest contraction in more than 12 months. In addition, retail inventories fell in April as sales weakened.
  • Inflation Slows: As noted last week, consumer prices remain weak. Inflation slowed in April to an annual rate increase of 1.7% year-over-year, down from the 1.9% recorded in March and 2.1% in February. Falling oil prices, excessive auto inventories, and increasing apartment rental inventories will all create headwinds to reaching the Fed’s target rate of 2.0%.
  • Factory Orders Down: Factory orders fell 0.2% in April. While motor vehicles rose 0.6% and computers gained 1.6%, durable goods orders fell 0.8%.
  • Oil Prices Drop: Though summer driving season is here, U.S. gasoline demand dropped by nearly a half-million barrels a day. While the need for fuel fell—and despite beliefs that oil would fall by 3.5 million barrels—stockpiles rose by 3.3 million barrels. As a result, oil dropped by 4%, ending the week at $45.86 per barrel.

What Comes Next

The Fed will hold a meeting this week to determine whether to raise interest rates. Expectations are that the Federal Open Market Committee (FOMC) will raise the fed funds rate 0.25% to 1.25% despite the soft economic news, which the Fed characterized as “transitory.” The FOMC meeting will also address quarterly forecasts for the remainder of the year. The markets expect both Japan and Britain’s central banks to also address the issue of interest rates.

In addressing the federal debt, the Treasury Secretary assured last week that the U.S. will not default on its debt. Congress must address the debt limit this summer or fall, but markets may react negatively if delays occur. Meanwhile, Congress continues to wrestle with policy questions around tax reform, an infrastructure program, and healthcare reform. How the government addresses these important initiatives could alter market dynamics in the future.

If you have questions on where you stand as these events unfold, do not hesitate to contact us. We are here to support your financial life with clarity and sound perspectives.

ECONOMIC CALENDAR

Wednesday: Consumer Price Index, Retail Sales, Business Inventories, FOMC Meeting Announcement
Thursday: Industrial Production, Housing Market Index
Friday: Housing Starts, Consumer Sentiment

How Rising Interest Rates Can Inspire Your Portfolio – Weekly Update for March 20, 2017

For the fifth time in six weeks, domestic stock indexes ended last week in positive territory. The S&P 500 gained 0.24%, the NASDAQ added 0.67%, and the Dow eked out a 0.06% increase. International equities in the MSCI EAFE grew by a sizable 1.99%.

Over the week, we received a series of economic updates that gave a mostly positive view of the economy’s progression, including the following data for February:

In addition, the most recent data indicated that fewer people filed for unemployment benefits the week of March 11. We have now experienced 106 straight weeks of unemployment claims staying below 300,000 people, which is a healthy labor market indicator.

Given this information—and the wealth of economic data released recently—the markets expected the Federal Reserve’s March 15 decision to raise benchmark interest rates. Last week’s 0.25% increase is only the third jump since the Great Recession, and the pace of hikes is quickening. The Fed has now raised rates in December 2015, December 2016, and March 2017 and expects at least two more increases this year.

Like with all economic data, understanding the context is critical. While interest rates are on the rise, they are still low, as you can see in the chart below.

How will rising rates affect your financial life?

When the Fed raises rates, they are demonstrating a belief in the economy’s strength. As with all changes to monetary policy, the outcomes can be complex and interconnected. While no one can predict the future, here are a few places where interest rates may affect your finances:

  1. Stocks

Stocks rose following the Fed’s announcement, with the S&P 500 gaining 0.84% on Wednesday. A strong economy is good for stocks; but anticipating exactly what lies ahead is impossible because so many outside forces impact equities. Right now, however, the markets are performing well and responding positively to increasing rates.

  1. Bonds

Generally speaking, as interest rates rise, bond yields go up and their prices go down—with long-term bonds suffering the most. However, those are not hard-and-fast rules for how to move forward. Your specific needs and strategies will determine the best way to move forward with bonds in a rising interest rate environment.

  1. Revolving Debt

If you have revolving debt—credit cards, home equity line of credit, etc.—and your interest rates are variable, you will likely see a difference in your payments very soon. In fact, a 0.25% increase like we experienced last week may cost consumers an additional $1.6 billion in credit-card finance charges in 2017 alone.

  1. Cash

When revolving debt interest rates go up, banks may quickly adjust the interest rates they charge, but they often wait to increase the interest rates they pay. Right now, the average savings account pays 0.11% interest, but some institutions offer rates up to 1.25%. Finding opportunities to capture a larger return on your cash is possible.

If you have questions about why the Fed is raising rates and how their choices may affect your life, we are always here to talk. Our goal is to give you the insight you need to feel informed and in control of your financial future.

ECONOMIC CALENDAR
Wednesday: Existing Home Sales
Thursday: New Home Sales
Friday: Durable Goods Orders

Too Close to Call: Fed’s Decision on Interest Rates – Weekly Update for March 6, 2017

On Wednesday, March 1, the three major domestic indexes all had their best performance in 2017 and reached record highs yet again. In fact, the S&P 500 hit 2,400 for the first time ever on the same day the Dow went above 21,000 for the first time. While the markets cooled slightly on Thursday and Friday, all three indexes were up for the week. The S&P 500 added 0.67%, the Dow increased by 0.88%, and the NASDAQ was up 0.44%. International equities in the MSCI EAFE also grew, adding 0.39% for the week.

In the midst of more record performance, we received a number of data updates that help improve our understanding of the true economic environment and potential for the Fed to increase interest rates next week.

What We Learned Last Week

  • Fourth Quarter 2016 GDP Readings Stayed the Same

On February 28, we received the second reading of Gross Domestic Product (GDP) for the fourth quarter of 2016. The consensus expectation was for the reading to increase to 2.1% from the 1.9% growth in January’s Advance report. However, the newest data did not show any change in Q4 GDP.

  • Manufacturing Activity Increased

The ISM manufacturing survey beat expectations to come in at 57.7 for February—the highest reading in 2.5 years and the best yearly start since 2011. Levels over 50 indicate expansion, so this data provides a positive signal for our manufacturing sector.

  • Service Sector Activity Increased

In February, the service sector grew for the 86th straight month, with the ISM non-manufacturing survey coming in at 57.6. Both new orders and business activity had faster expansion, and the employment index also increased.

  • Consumer Confidence Hit a More Than 15-Year High

The latest consumer confidence numbers from the Conference Board have not been this high since July 2001. Fewer people think that jobs are “hard to get,” and many “consumers expect the economy to continue expanding in the months ahead.” Of course, consumer confidence is no guarantee for future circumstances; instead, it measures sentiment and currently indicates that many people feel more positively about the economy.

  • Personal Income Went Up

The latest personal income data indicated a 0.4% increase in January—for a 4.0% yearly increase. In addition, the Personal Consumption Expenditure (PCE) deflator, which measures consumer inflation, grew by 0.4% in January, the largest monthly increase since 2011. The Federal Reserve follows the PCE deflator very closely, so this recent jump could be another sign that a March interest-rate increase could be more likely to occur.

These data updates are only a few of the economic details we learned last week, but together, they may help explain why the Fed could increase rates in the March 14 – 15 meeting. As recently as Tuesday morning, the odds of a rate hike were only 35%. By Friday, they had increased to 81%, due to strong economic data and remarks from Fed representatives. On Friday, Fed Chairwoman Janet Yellen said that if employment and inflation continue to change as they expect, then a change to the “federal funds rate would likely be appropriate.”[xviii]

Combined with the recent PCE deflator increases, this Friday’s employment data should help provide more context for the Fed’s decision. However, as we have seen before, no one truly knows what the Fed will decide until they make their announcement after the meeting. For now, we will monitor the data and wait to hear the Fed’s announcement on March 15.

Economic Calendar

Monday: Factory Orders
Tuesday: International Trade
Wednesday: Productivity and Costs
Thursday: Import and Export Prices
Friday: Employment Situation

Upcoming Reports Impacting the Market – Weekly Upate for February 27, 2017

Once again, domestic markets reached record highs last week. The S&P 500 was up by 0.69% and the NASDAQ increased by 0.12%. With its 0.96% week-over-week growth, the Dow has posted gains for 11 straight days and is currently experiencing its longest record streak since 1987. On the other hand, international equities in the MSCI EAFE lost ground, dropping by 0.25% for the week.

Last week did not offer much new information on economic fundamentals. With the exception of January increases for new single-family homes and the fastest pace of existing home sales since 2007, we do not have a tremendous amount of new data to share.

In the absence of this data, focusing on the roiling political conversations becomes much easier. As we have said before, we encourage you to pay attention to how the economy is performing—not what the headlines are blaring. Rather than recount the policy debates and political back-and-forth, we will discuss three important economic developments on our horizon: revised GDP, February CPI, and Fed interest rate deliberations.

What’s Ahead?

February 28: Revised Q4 2016 GDP

On Tuesday, we will receive the second growth estimate of the U.S. economy during the fourth quarter of 2016, which came in at 1.9% in the first estimate. Consensus is that the revised estimate will increase to 2.1%, but we will have to wait until March 30 to see the third and final measurement of Q4 economic growth.

The Bottom Line: GDP is key in measuring the U.S. economy’s strength. Any upward revisions would signal our economy is growing faster than the initial readings indicated.

March 15: February Consumer Price Index (CPI)

In January, the CPI experienced its largest month-over-month jump since 2013. The upcoming February report will help to show whether prices are continuing to increase and how the cost of living is changing.

The Bottom Line: The CPI measures changes to the average cost of specific goods and services that consumers purchase and is a key indicator for inflation. This data
affects the bond and equity markets, labor contracts, Social Security payments, tax brackets, and more 

March 15: Federal Open Market Committee (FOMC) Meeting Announcement

From March 14 – 15, the FOMC will meet and determine whether or not to raise the Federal Reserve’s benchmark interest rates. After the meeting concludes, Fed Chair Janet Yellen will announce their decision—a move that market participants will watch very closely. Yellen recently commented that “Waiting too long to [raise rates] would be unwise.” However, Wall Street does not expect an increase in March and shows a less than 1 in 5 chance of this move.

The Bottom Line: When the Fed changes its benchmark interest rate, the effects reverberate throughout our economy. According to Barron’s, the FOMC interest-rate policy meetings “are the single most influential event for the markets.” If the Fed decides to raise rates, this choice would affect interest rates now and also imply that monetary policy will continue to tighten throughout 2017.

These upcoming details are only a few of the noteworthy economic details on the horizon. If you have questions about what other fundamental data we are tracking or believe could affect your financial life, we are always here and would love to connect!

ECONOMIC CALENDAR

Monday: Durable Goods Orders, Pending Home Sales Index
Tuesday: GDP, Consumer Confidence
Wednesday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg Index,
Friday: PMI Services Index, ISM Non-Mfg Index

Rising Rates and Your Portfolio – Weekly Update for December 19, 2016

rates-are-upLast week was mixed for the markets, as the Dow increased by 0.44%, while the S&P 500 lost 0.06%, the NASDAQ dropped 0.13%, and the MSCI EAFE gave back 0.55%. We also saw a variety of data released, giving a similarly mixed view of recent economic activity. Retail sales and the Consumer Price Index showed modest gains, while industrial production and housing starts both declined.

The biggest headline from last week, however, was a development the market anticipated for quite some time: The Federal Reserve decided to raise its benchmark interest rates—for only the second time since 2006.

Why did the Fed raise rates?

The Federal Open Market Committee (FOMC), the group of Fed officials who meet to determine interest rates and other policies choices, has a mandate to “foster maximum employment and price stability.” In its quest to uphold this mandate, the FOMC aims to keep inflation at 2%, as this level can help support accurate financial forecasting and decisions while preventing harmful deflation.

The act of adjusting interest rates can help control inflation and support economic strength. At its most basic, when the Fed lowers rates, they are indicating that the economy is contracting—and when they raise rates, they are indicating that the economy is growing.

When describing her organization’s decision to raise rates this month to a range of 0.5 – 0.75%, Fed Chairwoman Janet Yellen said, “My colleagues and I are recognizing the considerable progress the economy has made. We expect the economy will continue to perform well.” The FOMC also said they may introduce three additional interest rate increases in 2017, up from their previous prediction of two raises.

In other words, the Federal Reserve believes our economy is on the right track and inflation may begin to rise. They are using the tool of interest rate increases to help keep employment and inflation at healthy levels.

How did the markets react to the interest rate increase?

Overall, investors seemed to react reasonably to the interest rate increase. The VIX, a measure of expected volatility in the markets, increased by 4.6%—but it remains at low levels. In other words, the likelihood of great volatility seems slim.

One area of the market, however, did not respond well to the Fed’s interest rate increase and inflation increase prediction: bonds. This summer, global bond markets experienced a rally in response to a variety of factors, including potential slowing economic growth worldwide. But since the U.S. election, the value of government debt has dropped by more than $1 trillion, as investors now expect greater inflation and a quickening economy. Essentially, the faster the economy and inflation grow, the less value that long-term government debt holds—contributing to the bond market’s recent losses.

How could the rate increase affect you?

Rising interest rates have both positive and negative effects for individuals. If you have money earning interest in the bank, you can expect to earn a slightly higher return. Conversely, if you borrow money—such as taking out a new mortgage or refinancing existing liabilities—your interest rate may be higher than before the Fed’s announcement.

In addition, the interconnected relationships between equities, bond markets, and other financial vehicles will evolve as interest rates increase. These shifts can be much more complex, and we are here to help you stay on top of any changes and align your financial life with the current market environment.

ECONOMIC CALENDAR

Monday: Janet Yellen speaks at 1:30 p.m. ET
Wednesday: Existing Home Sales
Thursday: Durable Goods Orders, GDP
Friday: New Home Sales, Consumer Sentiment

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