Stocks moved lower after the Federal Reserve wrapped up its two-day June Federal Open Market Committee (FOMC) meeting this week. While no action was taken on either tapering bond purchases or raising short-term interest rates, both appear closer to becoming reality than previously expected. After touching new record highs this week, the S&P 500 Index and NASDAQ Composite Index fell back in late-week trading. Oil prices continued their upward momentum – even as other commodity prices declined from recent highs – as supply and demand imbalances permeate the economy.
For the week, the S&P 500 Index finished down 1.9%, while the Dow Jones Industrial Average fell 3.5%. Year to date, the S&P is up 10.9%; the Dow has gained 8.8%. Unemployment figures were mixed, as weekly first-time claims increased to 412,000 while continuing claims were unchanged at 3.5 million. Retail sales fell in May, as consumers reduced spending on goods in favor of services. Inflation, while elevated, continues to be concentrated in a few areas. In fact, more than half of the Consumer Price Index increase in April and May resulted from price increases in used cars, rental cars, hotels, and airfare. While not definitive, this lends credence to the “transitory” theory of higher inflation, as these markets are recovering from severe pandemic disruptions and won’t be able to raise prices forever.
The Federal Reserve is employing two main methods to support the economy: bond purchases and near zero short-term interest rates. The Fed currently buys $120 billion a month of Treasury bonds and mortgage securities, to provide (in their view) liquidity and stability. Whether or not this is the most appropriate action for the Fed to take has been the subject of much debate; however, it is clear that markets have grown accustomed to this level of intervention and are quick to react to any perceived change in strategy. By keeping short-term interest rates low, the Fed seeks to inject even more monetary stimulus into the economy – of course running the risk of inflation if things heat up too quickly.
This week’s FOMC meeting was notable in that the Fed signaled that it may adjust both policies sooner than expected. Through comments by Chairman Jerome Powell and via release of its “dot-plot” of future interest rate projections, the Fed 1) telegraphed a beginning to tapering of bond purchases in late 2021 or very early 2022 and 2) projected their estimated start for raising short-term interest rates to late 2022 or early 2023. Stocks reacted negatively to this slightly sooner timeframe, since any Fed program of interest rate hikes raises concern that its activity will prematurely stifle GDP growth.
We are still confident in our belief that stocks will outperform bonds over the next 12 months, but we continue to analyze Fed commentary along with other market news for signals that indicate changes to our positioning are warranted.
As always, please contact us with any questions. We are here for you every step of the way.