RECAP: for the week ending September 23rd

September 25, 2016

most major indexes posted modest gains for the week as a whole, despite slumping into the close. The small-cap Russell 2000 Index performed best and managed to establish a new high for the year. The Federal Reserve’s monetary policy meeting on Wednesday and its decision not to raise interest rates seemed to be the primary driver of market sentiment during the week: The fed’s decision of ‘hold’ was mostly expected and during a speech afterwards Fed Chair Janet Yellen noted that slowing productivity growth had caused Fed officials to lower their long-term growth expectations for the U.S. economy, even as she noted that economic conditions had improved in recent months. This statement is seemingly less hawkish and may indicate that the next meeting, scheduled on the eve of the presidential election, may also result in a hold decision for interest rates.
The Fed’s decision not to raise rates had varying effects on major sectors: Financials lagged as investors were disappointed that lending margins would not rise, real estate investment trusts (REITs) saw gains as their high dividend yields remained attractive relative to bond yields. Energy stocks also got a boost as the U.S. dollar declined after the Fed meeting—many commodities are priced in dollars, helping lower costs and boost demand as the dollar weakens. Oil prices also rose at midweek on news of healthy demand and inventory drawdowns in the U.S. More specifically, share buybacks at Target and Microsoft saw those individual stocks rise, as did FedEx after its better-than-expected earnings were reported.

In Europe, stocks rallied around the Fed’s decision to leave interest rates unchanged. Last week the market was heavily anticipating the news from the BoJ which were set to meet. The outcome of that meeting included a Bank of Japan announcement indicating that it would adjust its asset buying to control bond yields, helping edge stocks as well. The pan-European benchmark Stoxx Europe 600, the UK FTSE 100, and the German DAX all reflected investor optimism early in the week but fell on Friday. Commodities, mining, and banking stocks were all strong risers but also led sector drops on Friday. This lack of faith in the recovering European economy could be due to renewed worries that the economy may not recover as fast as expected, highlighted by surprisingly weak manufacturing growth in Germany, the largest manufacturing sector in Europe.

In Asia the Nikkei 225 gained 235 points (1.42%) and closed at 16,754.02. Year-to-date, the Nikkei is down about 12%. On Wednesday, the Bank of Japan (BoJ) released its long-awaited policy statement and the findings of its “comprehensive assessment” of monetary policy, which was greeted by a sharp rally in stocks. However, after closing on Thursday for a holiday, the market sputtered on Friday as a stronger yen weighed on exporters. The central bank decided to tweak the conditions of its quantitative and qualitative easing (QQE) program rather than unleash another large dose of stimulus. Housing prices in China rose in August at the fastest monthly pace in at least five years, the latest data suggesting that loose credit conditions have spurred speculative homebuying and possibly an unsustainable housing bubble. China’s easy credit policies threaten to worsen the country’s already worrisome debt levels that have lately led to predictions of a financial crisis.

DeGroote on Facebook DeGroote on Twitter WMA LinkedIn