The following economic awareness entry is based on short-term events and therefore should not be taken as information towards making investment decisions, which are of a long-term nature. It is only meant to provide clarity regarding current economic events, as there is often a large degree of incorrect information dispersed through the media or other sources.
If you're one of the millions of Americans who have better ways of spending time than watching the Federal Reserve, you may be wondering what will happen now that the Fed has voted to raise interest rates last week for the first time since 2006.
In her remarks, Fed Chair Janet Yellen said that the Fed believes that the recovery has come a long way and that the economy is ready for a "modest increase" in interest rates. The chart below will help put the rate increase in perspective:
After years of historically low rates, the Fed voted to raise rate targets by just a fraction of a percent. Though we don't have definitive information about the pace of future rate increases, experts believe that the Fed is likely to raise rates several more times in 2016 and 2017, always assuming the economy remains on track for growth. Even if the Fed continues to raise rates regularly, it will take years to get back to historically average rates.
We can expect the coming weeks to be volatile for both stocks and bonds as investors adjust to the new rate environment. Historically, markets have experienced volatility after rate increases and occasionally moved into correction territory (defined as pullbacks of 10% or more). However, stocks and bonds usually experience positive returns in the initial years after the Fed begins tightening policy. That being said, the past doesn't predict the future, and we'll be closely monitoring markets in the weeks and months to come.
Bottom line: The Fed rate raise is not necessarily a bad thing. The hike underscores the fact that the U.S. economy has made tremendous progress in the last 7 years. However, the raise also comes at a time when millions of Americans are underemployed, inflation is still below targets, and global headwinds are blowing in the face of U.S. firms. Realistically, there was never going to be a perfect time to raise rates, and it's clear that the Fed is planning to take a gradual approach to future hikes.
Can the economy maintain its pace of growth without the Fed's foot on the accelerator? We'll see.
Tuesday: GDP, Existing Home Sales
Wednesday: Durable Goods Orders, Personal Income and Outlays, New Home Sales, Consumer Sentiment, EIA Petroleum Status Report
Thursday: Jobless Claims
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
Housing starts increase sharply. Groundbreaking on new construction rebounded from a seven-month low and jumped 10.5% last month. Permits for new buildings also surged to a multi-month high, highlighting strength in the housing market.
Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits dropped last week from a five-month high, suggesting that the labor market continues to improve.
Inflation remains stable. A measure of inflation - the general increase in the cost of goods and services in the U.S. - remained flat in November. However, core prices that exclude volatile food and fuel increased by 0.2%, indicating that inflation is firming up.
Industrial production drops in November. Warm weather and other factors drove the industrial sector of the economy lower by 0.6% last month. Though seasonal factors are affecting the data, lower global demand is making the effects more severe.
These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor 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.
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.
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 indexes from Europe, Australia and Southeast Asia.
The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.
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.
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