Weekly Edge: Is A Pause In Rate Hikes On The Horizon?

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by: Invest With An Edge

By Troy Tanzy

Co-authored by Daniel Rangel

Federal Reserve Board Chair Jerome Powell offered some insight into the Fed's - or at least Powell's - plan for rate hikes in the near future. The Federal Open Market Committee (FOMC), the Fed's monetary policy committee, stated it "believes that - for now - the best way forward is to keep gradually raising" the Federal Funds target rate, reports The Wall Street Journal. The statement came from Powell's testimony before the House Financial Services Committee on Tuesday morning, the first of two days of testimony during which the committee will answer questions from lawmakers on topics such as simplifying financial regulations and employment.

The Fed has raised interest rates twice this year and has indicated it plans to raise them twice more, followed by three raises in 2019. The FOMC has been raising rates steadily to rein in economic activity, but the goal is to ensure rates are high enough before the next recession to allow the Fed to then drop them to stimulate business activity if necessary.

A chief concern in the economy is the labor market, according to a report released by the Fed before Powell's testimony. The labor market is experiencing extremely low unemployment and modest to minimal wage growth, giving way to concern that the labor market may not be able to grow much tighter without overheating.

Another key factor in the report was President Trump's policy on trade. Trade disputes are causing unrest and tension in business spheres, which could affect confidence and damage financial markets if they continue.

The last factor is tax cuts, yet another Trump policy that has both lawmakers and economists uncertain. The tax cuts, which were passed in December 2017, effectively decreased the amount of money corporations lose to taxes, potentially increasing spending and investment.

All of these concerns boil down to one worry that plagues policymakers: Is the economy overheating? Powell's mention of a potential halt in the rate-hike path may mean he believes there is more room to grow and the growth will persist. On the other hand, if rate hikes stop and the U.S. enters a recession, the Federal Reserve may have one less tool in its already constrained tool belt to combat a downturn in the economy.

Sectors: Among the Sector Benchmark ETFs, the average momentum score decreased from 16.45 to 15.46. The results for the sectors were mainly positive for the week. Technology increased the most, up 6. Energy fell the most, down 14. Discretionary is the leading sector at 27, followed by Technology at 27 and Health Care at 25. Defensive and cyclical sectors were down, but sensitive sectors were up overall. Materials and Financials continue to reside at the bottom of the rankings. Ten sectors are "in the green," indicating a positive score for the week.

Factors: Among the Factor Benchmark ETFs, the average factor score increased from 13.64 to 13.82. The results were mixed for the week. Small Size fell the most, down by 7. Momentum increased the most, up 7 points. Yield and Value are at the bottom of the ranks with scores of 8 and 3, respectively. All 11 factors are "in the green."

Global: Global Benchmark ETF momentum scores were slightly up for the week. The average score by country increased from -6 to -5.18. The top positions continue to be dominated by developed global areas, including USA and Canada. Global areas had mixed results. The UK fell the most, down by 6 points. Latin America increased the most, up by 10 points. Latin America, Emerging Markets, and China are at the bottom of the ranks. Three of the 11 global areas remain "in the green."