Market Recap – Spotlight on the Fed as Q2 Kicks Off

in Market Commentary by

Market Digest – Week Ending 3/24/2017
It was a choppy week with global equities falling early, only to jump on Wednesday following the stronger-than-expected ADP National Employment Report. However, gains were short-lived as the recent Fed minutes spooked investors, causing stocks to sell off in the latter hours of the trading day. Treasury yields were relatively flat, while the dollar gained further against the euro. Gold ended the week slightly higher.

Weekly Returns:
S&P 500: 2,356 (-0.3%)
FTSE All-World ex-US: (-0.5%)
US 10 Year Treasury Yield: 2.38% (-0.01%)
Gold: $1,255 (+0.4%)
USD/EUR: $1.060 (-0.5%)

Major Events:

  • Monday – Tesla surpassed Ford in market capitalization, making it the second largest U.S. automaker behind GM
  • Tuesday – Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, stepped down amidst involvement in a 2012 leak of confidential information
  • Wednesday – A report from ADP showed the U.S. private sector added a better-than-expected 263,000 jobs in the month of March
  • Wednesday – The Fed released its latest minutes, showing officials want to start reducing the central bank’s balance sheet later this year
  • Thursday – In a surprise attack, the U.S. launched close to 60 cruise missiles at an air base in Syria following reports of chemical weapons used by the Assad regime
  • Friday – After changing the rule on filibusters, the U.S. Senate confirmed Trump-nominated Neil Gorsuch to the Supreme Court

Our take:
The first quarter of 2017 is now at an end. It was an interesting period, with politics garnering most of the attention. International stocks led asset class returns, followed closely by gold and foreign real estate, while commodities lagged on weakness in energy. We’ll provide a more in-depth review in our quarterly market commentary, which will be released shortly.

But as we start Q2, a familiar face has already recaptured the spotlight: the Federal Reserve. On Wednesday, the Fed released its latest minutes, addressing a long-standing elephant in the room: the central bank’s inflated balance sheet. Officials agreed to start shrinking the $4.5 trillion portfolio later this year, but remained undecided on the pace of the reduction. The news surprised markets, sending stocks sharply lower in afternoon trading.

Despite this, markets stabilized the very next morning, which is a more telling story than the initial knee-jerk reaction. The reduction is widely expected to start with the Fed’s reinvestment policy, where it would stop reinvesting proceeds from maturing securities on its books. Whether it phases this process in or stops reinvestment all at once, the balance sheet would naturally shrink over time. It is also very possible the Fed pauses its rate hike campaign during the initial stages of this reduction to mitigate any economic disruption.

Full details are still unknown, but again, the likely outcome is a slow and measured reduction of the balance sheet.

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Brendan Erne, CFA
Brendan Erne serves as the Portfolio Management Team Leader with Personal Capital Advisors. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-managed a large cap growth portfolio and co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.
Brendan Erne, CFA

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