Will The Federal Reserve Avoid A Slowdown?

Summary

  • Market fundamentals remain stable with earnings momentum and a steady economy.
  • Monetary policy experiencing a material change as the Federal Reserve outlined a program to reverse quantitative easing.
  • A combination of rising interest rates and a shrinking money supply, from the reversal, elevates monetary policy risk.
  • We believe Federal Reserve will reduce the planned rate hikes for 2018 and perhaps even 2017 if the reversal process begins later this year.
  • Stocks remain in an uptrend although the risks are elevated.

Market Pulse

Graycell Advisors - Market Pulse

Sometimes it is best to be invested and hold tight, not jumping in-and-out of the market as the calls for a bear market mount. The market this year has been one of such times, and investors who are staying the course are getting rewarded. Sitting on hands is one of the hardest things for an investor to do, as Warren Buffett has noted.

Seasoned market prognosticators and a rising number of writers on this medium have been publishing on the imminent demise of the bull market for many months, as highlighted in our earlier article The Relentless Market and Missed Calls. They have not been right thus far, and that doesn't mean they will never be right. But we feel they will have to wait a little longer.

Fundamentals

In our prior market outlook writings, including Market Outlook 2017, we have emphasized what we believe are fundamental underpinnings supporting a stock market - Earnings, Economy and Federal Reserve's Monetary Policy.

Stock Market Pillars

Earnings growth has been strong, with the first quarter earnings growth of 14% for S&P 500 companies showing momentum that has not been witnessed since 2011 - over 5 years ago.

The Economy remains steady at around 2% GDP growth level, though recent economic reports, particularly on retail sales, have been less than robust.

However, on the Monetary Policy front, a material change has occurred over the past month.

Monetary Policy

Recessions typically occur during a period of interest rate tightenings when imbalances in the economy are not read in a timely manner to align with policy adjustments thus precipitating a slowdown. A rapid rate of tightening has more than once sent an economy into a recession.

In the mid-June meeting, the Federal Open Markets Committee (FOMC) kept its tightening pace by raising interest rates to 1%-1.25% band and projecting one more

This article was written by

Tarun Chandra, CFA profile picture
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A healthcare growth portfolio with a record of consistently strong returns

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