Fed Raises Rates Again

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.[1] International equities in the MSCI EAFE grew by a sizable 1.99%.[2]

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:

  • The Producer Price Index beat expectations and rose 0.3%.[3]
  • The Consumer Price Index beat expectations and rose 0.1%.[4]
  • Retail Sales met expectations and rose 0.1%.[5]
  • Housing Starts beat expectations to reach 1.29 million - including the highest measure for single-family home construction since 2007.[6]

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.[7]

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.[8] Last week's 0.25% increase is only the third jump since the Great Recession, and the pace of hikes is quickening.[9]  The Fed has now raised rates in December 2015, December 2016, and March 2017 and expects at least two more increases this year.[10]

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.[11] 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.[12]

2. Bonds
Generally speaking, as interest rates rise, bond yields go up, and their prices go down, with long-term bonds suffering the most.[13] 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.

3. 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.[14]

4. 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.[15] Right now, the average savings account pays 0.11% interest, but some institutions offer rates up to 1.25%.[16] 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

 


What A Difference Eight Years Makes

After at least four consecutive weeks of growth, the three major domestic indexes all lost ground this week. The S&P 500 was down 0.44%, the Dow lost 0.49%, and the NASDAQ declined 0.15%.[1] Meanwhile, international stocks in the MSCI EAFE grew by 0.38%.[2]

This week, the Fed meets to determine whether or not to raise benchmark interest rates for the first time in 2017. Right now, the market gives a 93% chance of a rate hike.[3] 

In this update, rather than analyzing what lies ahead or what happened last week, we would like to acknowledge just how far the U.S. economy has come since 2009.

On March 9th, we marked the 8-year anniversary of when markets during the Great Recession hit the bottom on their lowest day. At that point in the economic meltdown, the Dow and S&P 500 had both lost more than 50% of their value since October 2007.[4] Every investor likely remembers the fear that gripped the U.S. and global economies, as questions lingered of how low we could go. 

Today, we can see just how far the markets and economy have come since March 2009, and the growth investors could have missed if they avoided the markets. Take, for instance, the S&P 500.

On March 9, 2009, the index fell to 676.53.[5] Eight years later it rebounded to 2364.87.[6] With reinvested dividends, that growth represents an average annual increase of 19.45%.[7] And, the fundamental data tells a very similar story.

Four Economic Measures: From March 2009 to Today

1. Gross Domestic Product

  • March 2009: We learned the economy had fallen by a 6.3% annual rate during the fourth quarter of 2008, its largest decline in 26 years.[8]
  • Today: GDP recovery has been more plodding than many people might prefer, but, nonetheless, nearly every quarter has shown growth since 2009.[9] And, over the past two years, GDP has increased at a 3.2% annual rate.[10] 

2. Home Prices

  • March 2009: The median home price was $169,900.[11]
  • Today: The most recent data from January 2017 indicates that median home prices have increased to $228,900, a 34.7% increase since March 2009.[12] 

3. Unemployment

  • March 2009: The unemployment rate was 8.7% and would climb to 10% by October 2009.[13]
  • Today: The most recent data from February 2017 shows an unemployment rate of 4.7%.[14]

4. Total Employment

  • March 2009: The economy had lost millions of jobs during the recession and would continue to lose millions more throughout 2009.[15]
  • Today: As of February 2017, the economy has added nearly 12 million jobs since March 2009.[16]

Throughout this economic recovery, people have seemed concerned the bull market was about to end. When discussing the bottom of the market five years ago, in the March 12, 2012, Weekly Update, we wrote about many analysts' worries that a pullback was imminent. Even last year, one MarketWatch columnist wrote an article titled "Happy Birthday Bull Market -- Now Write Your Will," warning that the markets would not reach new peaks in the near future.[17] The S&P 500 has gained around 19% in the months since then.[18] 

Of course, no one can predict exactly when this bull market will begin to decline. And, at eight years old, only one recovery has lasted longer since World War II.[19] 

As always, we will continue to offer the advice we believe suits your best interests in every market environment: Focus on your long-term goals and personal needs, not headlines and emotions. We have come a long way in eight years, and we will continue to guide you through the market's changing times and inevitable fluctuations. If you have questions about where you stand today or how to prepare for tomorrow, we are here to talk.

ECONOMIC CALENDAR

  • Tuesday: FOMC Meeting Begins
  • Wednesday: Consumer Price Index, Retail Sales, Housing Market Index, FOMC Meeting Announcement
  • Thursday: Housing Starts
  • Friday: Consumer Sentiment

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies. 

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia and Southeast Asia. 

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Gross Domestic Product (GDP) is a measure of output from U.S. factories and related consumption in the U.S.  It does not include products made by U.S. companies in foreign markets.

The Federal Reserve System (also known as the Federal Reserve and, informally, as the Fed) is the central banking system of the United States. The Federal Reserve System is composed of 12 regional Reserve banks which supervise state member banks. The Federal Reserve System controls the Federal Funds Rate (aka Fed Funds Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

Consult your financial professional before making any investment decision.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

[1] http://finance.yahoo.com/quote/%5EGSPC/history?period1=1488517200&period2=1489122000&interval=1d&filter=history&frequency=1d 

http://finance.yahoo.com/quote/^DJI/history?period1=1488517200&period2=1489122000&interval=1d&filter=history&frequency=1d 
http://finance.yahoo.com/quote/^IXIC/history?period1=1488517200&period2=1489122000&interval=1d&filter=history&frequency=1d

[2] https://www.msci.com/end-of-day-data-search 

[3] http://www.cnbc.com/2017/03/10/us-markets.html 

[4] http://money.cnn.com/2009/03/09/markets/markets_newyork/ 

[5] http://finance.yahoo.com/quote/%5EGSPC/history?period1=1236571200&period2=1489035600&interval=1d&filter=history&frequency=1d 

[6] http://finance.yahoo.com/quote/%5EGSPC/history?period1=1236571200&period2=1489035600&interval=1d&filter=history&frequency=1d 

[7]  http://www.investmentnews.com/article/20170306/FREE/170309947/clients-fret-as-bull-market-reaches-8th-birthday 

[8] http://money.cnn.com/2009/03/26/news/economy/gdp/index.htm?postversion=2009032610 

[9] http://www.ftportfolios.com/Blogs/EconBlog/2017/2/28/real-gdp-was-unrevised-at-a-1.9percent-annual-growth-rate-in-q4 

[10]  http://www.ftportfolios.com/Blogs/EconBlog/2017/2/28/real-gdp-was-unrevised-at-a-1.9percent-annual-growth-rate-in-q4

[11]  http://www.denverpost.com/2017/03/09/8-facts-about-the-8-year-long-wall-street-bull-market/

[12]  http://www.denverpost.com/2017/03/09/8-facts-about-the-8-year-long-wall-street-bull-market/

[13]  https://data.bls.gov/timeseries/LNS14000000

[14] https://data.bls.gov/timeseries/LNS14000000 

[15]  https://www.bls.gov/charts/employment-situation/civilian-employment.htm

[16]  https://www.bls.gov/charts/employment-situation/civilian-employment.htm

[17]  http://www.marketwatch.com/story/happy-birthday-bull-market-now-write-your-will-2016-03-09

[18]  http://www.marketwatch.com/story/this-is-the-bull-markets-8th-birthday-no-wait-this-is-the-anniversary-2017-03-06

[19] http://www.denverpost.com/2017/03/09/8-facts-about-the-8-year-long-wall-street-bull-market/