Market Recap – As expected, Brexit gives the Fed pause. But for how long?

in Market Commentary by

Market Digest – Week Ending 7/29

Stocks moved sideways in choppy trading this week as the markets digested a combination of mixed earning results, the latest Fed meeting, and the DNC convention. International stocks and gold were positive, while oil dropped on renewed fears of a supply glut.

Weekly Returns:

S&P 500: 2,174 (-0.0%)
FTSE All-World ex-US: (+1.50%)
US 10 Year Treasury Yield: 1.46% (-0.11%)
Gold: $1,351 (+2.2%)
USD/EUR: $1.117 (+1.8%)

Major Events:

• Monday – LMVH sells Donna Karan to G-III for $650 million.
• Tuesday – Sales of new single-family homes increased 10.1% in the first half of 2016 compared with 2015.
• Tuesday – US consumer confidence mostly unchanged in July.
• Wednesday – Fed keeps benchmark rates unchanged, leaves room for possible rate hike in September.
• Thursday – Oracle agrees to purchase NetSuite for $9.3 billion.
• Thursday – DNC convention wraps up in Philadelphia.
• Friday – US GDP grows at 1.2% in second Quarter. Lackluster Fixed Investment and Inventories offset strong Consumer Spending growth.

Our take:

As expected, the Fed voted 9-1 to keep rates unchanged at 0.25%-0.5% in their meeting Wednesday, preferring to continue their wait-and-see approach with regard to domestic economic growth and the outlook for inflation. The UK’s surprise decision to leave the EU roiled global markets and set the expectation among economists and market participants that there would be no rate increase until December, at the earliest.

However, the equity market recovery from the Brexit shock has been remarkably swift, with US markets setting new 2016 highs just 9 days after the voting results were announced. Coupled with upbeat housing, labor, and consumer purchasing data, that recovery had the Fed more optimistic in their messaging than many people expected. Pundits were quick to point out that the statement “Near-term risks to the economic outlook have diminished” hinted at a rate hike remaining possible in 2016, as long as there were no further shocks to the system.

Regardless of what the Fed decides to do this year, the fact is that rates remain far below historical averages, and few quarter-point hikes are not likely to have a large impact. For comparison, in 1980 the Fed caused rates to fluctuate between 8.5% and 20%, over a single year! Against that backdrop, the current hand-wringing over a possible quarter-point hike seems a bit overblown.

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Matt Lenore

Matt Lenore

Matt Lenore is a Research Associate at Personal Capital. He left a traditional portfolio manager to join Personal Capital to be part of revolutionizing the wealth management industry. When he's not trading, he loves tracking the markets and scheming about investment strategy. He graduated cum laude with a degree in economics from Brandeis.

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