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Market Recap – Fed Raises Short Term Interest Rates

Market Digest – Week Ending 12/18

It was a volatile week for stocks. On Wednesday, the Fed raised short term interest rates for the first time in almost a decade. Comments that future raises would be modest and spread out created an initial positive reaction and the S&P 500 ended the day up about 3% for the week. But it was a case of sell on the news. Stocks fell Thursday and Friday and the S&P 500 finished the week down modestly. International stocks fared better, up about 1% despite a rise in the dollar. Oil resumed its decline, with West Texas Crude dropping below $35 per barrel.

Weekly Returns:

S&P 500: 2,006 (-0.3%)
FTSE All-World ex-US: (+0.9%)
US 10 Year Treasury Yield: 2.19% (+0.06%)
Gold: $1,066 (-0.8%)
USD/EUR: $1.087 (-1.1%)

Major Events:

• Monday – Newell Rubbermaid bought Jarden for $15.4 billion, acquiring brands such as Rawlings, Coleman and Mr. Coffee.
• Tuesday – Despite pressure from activist investors, Qualcomm said it will not split the company into two pieces.
• Tuesday – 3M lowered its sales forecast, citing slowing demand for consumer electronics and industrial supplies.
• Wednesday – Congress extended a tax break allowing people over 70.5 to donate from IRAs on a pre-tax basis.
• Wednesday – The Fed raised its benchmark rate by 0.25% and said it expects to continue to raise it gradually over the next three years. Projections show Fed members expect the rate to increase by a further 1% over 2016.
• Thursday – Turing Pharmaceutical CEO Martin Shkreli was arrested for securities fraud and conspiracy. He is widely disliked for a history of acquiring drugs and significantly raising prices.
• Thursday – Congress allowed for the export of US oil for the first time in 40 years and also extended tax breaks for solar and other renewables.
• Thursday – Star Wars, the Force Awakens, set a record for a Thrusday night opening with $57 million in sales in the US and Canada.

Our take:

Well, there you have it. The Fed’s rate hike on Wednesday had all the hype and sizzle of the last Floyd Mayweather fight – which is to say a lot of build-up and not much action. As expected, the Fed raised short rates by 0.25%. Fed members indicated they expected another four such moves in 2016, which would bring short rates to around 1.375% in a year’s time.

The assurance that nothing more dramatic would happen soothed some. But when the world woke up on Thursday, it realized that global economic growth is what matters for markets, not a quarter point difference in rates in one country. Based on stock market reaction, the picture isn’t pretty. The US is doing fine. Europe continues to show encouraging signs, only to stagnate again. China is decelerating and no one knows how fast or how far.

Decimated commodity prices suggest the global economy may already be in worse shape than people realize, but they also have a positive impact on profits for many companies outside the Materials and Energy sectors. 2016 will be an interesting year – and at least we can now focus on something other than when the Fed may raise rates.

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