Week of August 22, 2016
US markets snapped a multi-week positive streak with the Dow Jones Industrial Average and S&P 500 down 0.13% and 0.01%, respectively. The tech-heavy NASDAQ Composite outperformed both to hold on to positive territory, posting a 0.10% return for the week.
International markets were down slightly, largely driven by a pull-back in European equities. The MSCI Europe Index was down 0.42% while Chinese equities, however, were the lone bright spot with a weekly return of 1.79% as measured by the Shanghai Composite. In our commentary we look at the health of the US consumer and discuss two stories with a common thread: the market's increasing lack of faith in central bank policy. We end our weekly review by looking at the interesting history of the fire station's most recognized mascot, the Dalmatian.
US Dollar Pullback
The US dollar slid last week as investors adjusted their expectations of future interest rate increases by the Federal Reserve. Demand for the greenback typically surges when investors see a greater chance of an impending rate hike but the Fed has been sending mixed messages to the markets. Numerous Federal Reserve bank presidents have given conflicting statements on the future path of rates, commenting that a rate increase by year end is possible while also hinting that future growth may not justify further rate increases into next year. The markets reacted by pulling the US dollar to its lowest level in over 14 months. What's more, federal funds futures, which are used by investors to bet on policy actions enacted by the Federal Reserve, are indicating a 55% probability that the central bank raises rates by year end. For comparison, that is down from the 94% at the beginning of the year.
Negative Interest Rates Not Working?
Everything else being equal, the goal of low interest rates is to spur investment and spending as rates on savings fall in response and consumers are enticed to spend more or move their money into riskier assets. Central banks across the globe have taken this thought process a step further by taking rates below zero. However, there may be some unintended consequences. According to research conducted in Europe where the European Central Bank is currently using a negative interest rate policy, or NIRP, the negative rates do not appear to be having their desired effect. Indeed, some economists believe the policy has driven investors to do the one thing central banks didn't want them to: increase savings. One of the primary reasons economists cite for the increase in savings is the uncertainty and weak economic environment that negative rates convey. Of the countries seeing higher savings rates, Germany and Japan are showing increases despite their negative rates and what's more, Denmark, Switzerland and Sweden, all non-Eurozone countries, are experiencing the highest savings rates since 1995 according to the Organization for Economic Cooperation and Development which started collecting data the same year.
Personal Income and Spending
According to data, the US consumer spent more the end of the second quarter than economists had expected, giving the markets hope that the strong growth will continue into the latter half of the year. Consumer spending rose by 0.4% in June, bringing the annualized growth rate of consumer spending to 4.2%. Furthermore, this jump in consumer activity accounted for almost all of the second quarter gross domestic product (GDP) growth of 1.2%. GDP is a measure of an economy's output and consumer spending comprises roughly two thirds of US economic output on average. While the gains are promising, there was little evidence of inflation over the same period. Inflation is an important metric the Federal Reserve uses to gauge economic performance and it has run below their target of 2% since the central bank announced the goal back in 2012.
Fun Story of the Week
Dalmatians, the official mascot of fire stations everywhere, have a long and storied history with their firefighting companions. Their connection with firefighters actually dates back to the early 1700s when people came to find the dogs running alongside horses, developing strong bonds with their equine partners. The Dalmatians would protect them from other dogs and animals that could easily startle the horses. Given their calming demeanor and how protective they are around the horses, the dogs made a natural companion for the horse-drawn carriages that firefighters originally used. Not only did the dogs calm the horses around fire, they also guarded the carriage and the horses while the firefighters were working. Carriages and horses were extremely valuable and, despite buildings being on fire, firefighters had to constantly worry about a thief running off with their horses and equipment. Of course, firefighters don't use carriages any more but the Dalmatians continue to roam fire stations to this day.
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This material was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
DJIA
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
NASDAQ COMPOSITE
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI EUROPE INDEX
The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
SHANGHAI COMPOSITE INDEX
The Shanghai Composite Index is a market index of all stocks (A shares and B shares) that are traded on the Shanghai Stock Exchange. It tracks the largest publicly traded companies in China.
CNBC, August 2016. http://www.cnbc.com/2016/08/02/personal-income-and-spending-june-2016.html
Wall Street Journal, August 2016. http://www.wsj.com/articles/are-negative-rates-backfiring-heres-some-early-evidence-1470677642
Wall Street Journal, August 2016. http://www.wsj.com/articles/dollars-drop-signals-doubts-over-fed-rate-rise-1471388693
Wall Street Journal, August 2016. http://www.wsj.com/articles/global-stocks-dip-as-dollar-retreats-1471333475
Live Science, May 2011. http://www.livescience.com/33293-dalmatians-official-firehouse-dogs.html