With both positive economic data and mixed earnings reports to consider, global equities are wandering sideways after a monthlong advance, waiting for the Federal Reserve's policy decision Wednesday afternoon. When the decision came, not much changed.
By Vikram Rangala
Wednesday, July 27, 2016
Shares of Apple, Inc. soared as the company beat earnings expectations. Analysts report that its less expensive iPhone SE model, contrary to worries that it might erode the brand's image, enjoys a great deal of popularity and has exceeded sales forecasts. Tech shares in the S&P 500 soared on the strength of Apple, pushing the sector's value to a 16-year high.
A 16-year high stretches back to the first tech bubble, a time before the iPhone and before widespread use of cell phones. That's before Blackberries, MySpace, Facebook, and Twitter. Back then, all Apple made was Macs and Powerbooks and...remember these? Newtons. The closest thing to an iPhone was the Palm Pilot. This time, the highs in the tech sector are not part of a bubble and may well reflect a wider strength in equities.
If that's the case, the markets are likely to have more volatility once the Fed announcement is out of the way. That's not to say it will automatically rally. The rise in tech stocks was offset by sectors like energy, which was weighed down by a drop in crude oil prices. West Texas Intermediate Crude Oil futures dropped below $42 a barrel on Wednesday morning.
Other earnings reports also reflected the mixed tenor of this earnings season. In some cases, perfectly good stocks took hits not because the companies are doing anything wrong, but just because they missed expectations. Consumer companies like Coca Cola and McDonald's, both of which have performed well overall, fell short of analyst expectations and fell, pulling the consumer product sector down with them.
Consumer shares fell 1.3 percent after the reports from Coke and McDonald's. The S&P energy sector also fell about one percent on the drop in commodity prices.
After the announcement, more of the same
When the Federal Open Market Committee released its decision Wednesday afternoon, it left interest rates unchanged with a Fed Funds target rate of 0.25%-0.50%. This was what most analysts expected. Among the reasons why: a strong desire not to cause further unrest to global markets in the aftermath of Brexit.
At the same time, the Fed's forward guidance, in which it gives the group's consensus opinion on the state of the US economy, was mroe optimistic than it has been so far this year.
The statement said in part, “Near-term risks to the economic outlook have diminished." That they used the word "diminished" is one sign of how definite they are. That they didn't couch the verb in phrasing like "appears to have" or "shows strongs signs of" is not by chance. They choose every word with care, to the point that even the absence of a word or phrase can be taken by investors as implicit advice from Janet Yellen herself. Few documents get parsed and edited for word choice as closely as FOMC statements.
One notable choice was the statement that job creation was "strong" in June. The Fed chose not to dwell on what it termed "weak growth in May," when nonfarm payroll was a paltry 11,000. Instead, the Fed said that indicators viewed in aggregate “point to some increase in labor utilization in recent months." All recent months except that one, apparently.
The Fed noted a number of positive indicators, including retail sales, housing starts, capacity utilization, and service industries, which have all beat economists’ expectations. It noted that consumer household spending "has been growing strongly" in contrast to business investment, which it described as "soft" and which may reflect the continued use of corporate profits for buybacks rather than expansion.
With the Fed saying “that the labor market strengthened and that economic activity has been expanding at a moderate rate" and that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate," the Fed continued what Chair Janet Yellen has already been saying, that the Fed is likely to raise rates, but gradually.
At the same time, the May dip and ongoing market volatility, compounded by instability overseas, were reason enough for that increase to be put off. Only one FOMC member dissented publicly: Esther George, president of the Kansas City Fed,restated her preference for a quarter-point increase, which she had first made known in June.
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