Last week the Federal Reserve Bank held its October FOMC (Federal Open Market Committee) meeting. Investors pay keen attention to the written statements the Fed issues during these meetings. They attempt to glean information on the direction of the U.S. economy, interest rates, employment and inflation from the commentary the Fed issues.
This meeting was even more eventful as the Fed ended its “Quantitative Easing/QE3” program. QE3 policy was initiated in September of 2012 with the purpose of keeping interest rates low and stimulating the economy. By ending QE3 the Fed obviously feels the economy is strong enough to stand on its own two feet. I believe nobody sees better data on the economy than the Fed, and I’m very encouraged about the health of the U.S. economy and the end of QE3.
Last Thursday the first report of 3rd quarter “Real GDP” growth confirmed the health of the economy. It came in at 3.5%, handily beat expectations for a rise of 3.0%. See the chart below:
The Fed also monitors the employment markets closely. In the FOMC statement the Fed upgraded the health of the labor market. In the September statement the Fed stated:
“A range of labor market indicators suggests that there remains significant underutilization of labor resources…”
This changed in the October FOMC statement to:
“On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing.”
The Fed is definitely seeing an improvement in the jobs market. Lower unemployment rates and greater job creation has finally started wages growing again in America. See the chart below:
The Fed also sees inflation below target (around 2.0%) and thus will keep the Fed Funds rate at a 0 to 1/4% target for a considerable time following the end of QE3. In my opinion, leaving the “considerable time” verbiage in the FOMC statement signals the Fed’s intention to keep interest rates low for the time being. My guess is we don’t get a fed funds rate hike until the second half of 2015.
So the economy continues to recover, labor markets are improving, inflation is tame and interest rates should remain relatively low. Add to this a strong 3rd quarter corporate earnings season and we have a pretty decent environment for stocks.
October was a volatile month, but the markets still finished higher. Stocks don’t go up every day/month/year and we experience dips in the markets all the time. Trying to time these minor corrections or predicting the next crash can prove hazardous to long-term financial plans and goals.
To finish I’d encourage you to look at the chart of the BAML Sell Side Indicator:
When the average recommended equity allocation of Wall Street strategists (blue line) is below the brown line, that bearish sentiment is generally a positive contrarian indicator for stocks. Currently, Wall Street strategists are still recommending investors significantly underweight equities (52% vs. a long-term average weighting of 60-65%). Banc of America strategist, Savita Subramanian, notes that when the indicator is this low or lower, total returns over the next 12 months have been positive 96% of the time, with median returns of 26%!
Just something to consider………….
As of November 3rd, 2014:
Dow Jones US Moderately Conservative Index is up 6.54% (TR) for the year
S&P 500 closed at 2,017.81 up 10.81% for the year
Russell 2000 closed at 1,710 up 1.61% for the year
U.S. 10 year Treasury Futures are yielding 2.35% down 0.62% for the year
WTI Crude Oil futures closed at $78.32 down $20.38 for the year
Gold closed at $1,165 per ounce down $39 for the year
To expand on these market reflections or discuss other portfolio strategies please don’t hesitate to reach out to the Gradient Investment team.
