Financial Market Update - June 19, 2017Submitted by Capital Strategies Financial Corporation on June 19th, 2017
The Federal Reserve raised interest rates by 0.25% last week, bringing the Federal Funds Rate target to 1.00%-1.25%. This was expected, so the impact on stock and bond prices was minimal. The more important news was the weak retail sales and consumer price inflation reports. Those reports suggest that the economy might not be performing as well as stock prices have forecast. This makes stocks increasingly vulnerable to a decline. At the same time, European economies have been performing much better than was expected earlier in the year. As a result, we are seeing fund flows out of U.S. stocks and into international equities (primarily Europe and emerging markets). In addition, those weak economic reports have driven bond yields to a fresh 2017 low. It seems like every year experts predict rising rates (and they certainly did in 2017), but in fact interest rates keep falling. It is this continued decline in interest rates that have supported stock prices over the past several years, not earnings growth. In fact, subtract the effect of stock buybacks on earnings per share and earnings have been fairly flat over the past four years.