While no two weeks in the stock market are the same, last week was truly unusual. Stock prices started the week business-as-usual, like a distance runner keeping pace for the long haul. Then, an unexpected shock hit; the runner broke into an all-out sprint. But almost as soon as anyone noticed the change in pace, it was over. Now we’re back to the distance game.
Why the uptick in momentum? On Wednesday at 2:00 p.m., around the same time as the spike, the Federal Reserve raised its short-term interest rates by 0.25%. Was that enough to kick the market into high gear? Probably. But when it comes to the stock market’s temperament, shockwaves are generally the result of multiple occurrences, not just one.
Perhaps market behavior was impacted by the snow blast in the North East. Maybe it was fueled by the country’s intense focus on the GOP health care plan debate. Or, maybe by the reaction to America’s enchantment over the meeting between President Trump and Angela Merkle. Heck, maybe it was another case of March Madness, also known as the Warren Buffet $1 million a year for life challenge!
What probably didn’t rock the market’s boat was the release of President Trump’s tax returns. When all was said and done, this unveiling of the president’s financial history was anticlimactic, to say the least. The returns, which date from Trump’s early Apprentice years, showed earnings of about $150 million and roughly $38 million paid in taxes. Yawn.
While the market as a whole barely moved this week, there were some interesting outliers. Shares of Canadian Goose rose by 40% with the company’s initial public offering. And although Janet Yellen and the Fed’s hike may not have been fully responsible for the stock spur, it most certainly was a factor. Wednesday’s increase brings the Federal Funds Rate target from 0.5% to 0.75%.
Perspective is important here, both in the short and long game. While this past week’s rate hike didn’t change a whole lot, there are likely two more hikes on the horizon. The timing and size of those possible increases will depend on how the economy fares over the coming year.
What is clear is that the Fed expects inflation to hit about 2% by year’s end. If we don’t get there, the Fed will undoubtedly slacken and be less aggressive about ratcheting up interest rates. Keep in mind also that the Personal Consumption Expenditure (“PCE”) price index is still floating closer to 1.5% than the 2% Fed target, and unemployment is hovering around 4.5%. So, the U.S. economy isn’t in danger of overheating just yet.
And while Wall Street seems taken by the prospective upsides of President Trump’s economic policies, the Fed has declined to factor in possible stimulative economic effects of new White House policies. According to Federal Reserve Board Chairman Janet Yellen: “We have plenty of time to see what happens.”
Even more noteworthy than the stock market was last week’s bond market. Since last summer, we’ve been trending toward higher interest rates (as measured by the 10-year Treasury note). The start of 2017 saw rates of 2.4%, with growth up to 2.6% before Wednesday’s fillip. After the Fed increase, we saw a cooling off on bond rates, with the 10-year Treasury note falling to 2.5%.
Ultimately, this past week was a good reminder to investors – interest rates and the bond market aren’t always directly proportional to actions by the Fed. We are talking about a market, after all. While both stock and bond markets may try to front run Fed actions in response to the economy, no one has a crystal ball. As Yellen said, we have plenty of time to see what happens. Good advice.