The second quarter was marked by a very slow and steady rise in stocks, save for one 300-point Dow drop. Daily volatility has generally declined as investors begin to accept the fact that the Fed will be raising rates amidst an economy that is just “bumping along.” This is because the economic data remains much as it has over the past year; good but not great, neither weak or strong. Earnings will continue to rise if corporate America can continue to cut costs and repurchase shares. Given the recent weakness in both economic and inflation data, the Fed just might stand down until year-end, keeping rates below where they thought they would be, come December.
The Fed is watched closely by the markets, as press conference comments or Q & A sessions with Fed Governors have moved stock prices in both directions. They continue to stick to their script, even though the economic data has not really changed (for the better or worse) since year end. Following their most recent hike in June, Chair Yellen felt the low inflation we are experiencing is “transitory”, as she sees building wage and inflation pressures in various parts of the economy. So far, the data has not supported her comments. Whether looking at headline inflation, core (without food and energy) or various “median” measures that attempt to smooth the volatile data, inflation trends are lower. If we are to see a continuation of higher interest rates, we would expect to see inflation persist above the Fed’s 2% target for more than just a month or two.
The second quarter was much like the first, slow growth and weaker than expected data points in many parts of the economy. Washington continues to struggle to pass legislation that investors had banked upon early in the year, pushing out any potential benefits until 2018 at the earliest. Economists, notoriously poor at guessing data points, were disappointed during the second quarter as many of the “surprises” in the economic reports were negative.