Markets regained steam last week, pushed higher by a reassuring Federal Reserve meeting and a referendum on Scottish independence. For the week, the S&P 500 gained 1.25%, the Dow grew 1.72%, reaching a new record, and the Nasdaq rose 0.27%.
As was generally expected, the Federal Reserv voted to continue to taper its quantitative easing programs by another $10 billion per month. Digging a little deeper, meeting notes suggest that though the Fed believes the economy is still growing at a moderate pace, economists are still concerned about meager labor participation and growing income inequality. The official statement of the Fed's meeting shed little light on the timeline for interest rate changes, but Dallas Fed President Richard Fisher stated that the Fed should start raising rates in spring 2015, not summer, as many analysts have predicted. It's too soon to know how markets will react to a sooner-than-expected interest rate increase, especially since economic conditions between now and then may change.
The U.S. dollar has been on a tear over the last couple of months, making this the longest winning streak since 1973, and the return of a strong dollar has its share of winners and losers. A rising dollar helps fight inflation by making each dollar buy more in goods and services; it also makes it cheaper for Americans to buy imported goods. Since consumer spending makes up about 70% of economic activity, when consumers pocket extra money, it's generally a win for the economy. On the other hand, a stronger dollar is hard on exporters of U.S. goods, and multinationals who depend on foreign demand are being hit with a one-two punch of stagnant demand from major trading partners in Europe and Asia plus a rising dollar, which further cuts into their sales.
So, is a rising dollar ultimately good for the U.S. economy? In the short run, it'll probably be a net positive, since consumers are benefiting and will be able to spend more money. The long-term effects won't be known for some time; but, generally speaking, as long as currency movements remain stable, financial markets should be able to adapt.
The week ahead is packed with speeches by Fed insiders, which analysts will be mining for additional details after the Fed's official statement last week. With the end of the quarter upon us, investors are also starting to turn their attention to earnings, mid-term elections, and positioning their portfolios for the end of the year. Could we still see a correction? Absolutely. While the equity environment is looking healthy and the economy is doing well, a deteriorating economic situation in Europe and China or geopolitical issues in Ukraine or the Middle East could definitely throw a wrench into the works.
Monday: Existing Home Sales
Tuessday: PMI Manufacturing Index Flash
Wednesday: New Home Sales, EIA Petroleum Status Report
Thursday: Durable Goods Orders, Jobless Claims
Friday: GDP, Consumer Sentiment
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.
Factory activity falls in September. A key Federal Reserve indicator of manufacturing in the key mid-Atlantic region decelerated this month. The survey, covering factories in Delaware, eastern Pennsylvania, and southern New Jersey, is often seen as a bellwether for national trends.
Jobless claims fall to lowest level since July. Weekly claims for new unemployment benefits unexpectedly fell to 280,000, putting the labor market back on trend for sustained improvement.
Scotland votes "no" on independence. The E.U. weathered one of its first serious independence crises when a referendum on Scottish independence was defeated. While the vote was close and the issue may arise again, Scotland (and its valuable North Sea oilfields) will remain part of the U.K. and EU for now.
Housing starts to drop dramatically. Groundbreaking activity on new homes dropped 14.4% in August, led by a slump in multifamily apartments and condos. As Americans have shied away from homeownership in favor of renting, builders have started work on more rental units, a more volatile category of housing growth.
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