Financial Market Analysis: The Federal Reserve’s Recent Announcement

This month’s financial market analysis offers commentary on the potential implications of the Federal Reserve’s Wednesday, September 21, 2016 announcement that it is keeping interest rates unchanged, but alerted that it will likely raise rates soon. What is “soon”? I do not think anyone can really answer that question, and I am starting to believe that those that serve on the Federal Reserve board do not have the answer. For stocks to stay from dropping, it appears that the Federal Reserve has no choice but to keep rates low until the US economy shows signs of growth. The Federal Reserve continues with the message “no rate increase, but soon”, which it has conveyed for well over a year. Thus stocks have been “stuck” in the 17,500-18,500 range going on almost two years (a brief dip in January but quickly reversed back into range). There have been times when stocks have gone through periods of stagnant returns, and these times can last for years. Many stock market economists currently believe that stocks may remain “range-bound” for the following year, which is possible with market valuations being high. It is important that investors stick to a long term investment plan, understand their tolerance for risk, and answer the two most important questions investors must ask themselves: “Am I saving enough for the various goals that I am trying to achieve?” and “Do my investments have the appropriate risk given my goals?”

Being a successful investor requires patience at times; one must understand that stock prices do not always move higher but can also have significant corrections. I am sure you have heard the slogan “Buy low, and sell high”. Defining what is “low” and what is “high” is very difficult when emotion is involved in a decision. In my experience, investors who keep their eyes on the end goal do much better than investors who are tied to the day to day.

As we approach the election in early November, the stock market historically becomes more volatile. Rallies and corrections tend to be stronger. This does not always happen, but it is the norm. Historical stock market trend data is mixed, for those who are using the stock market to gauge who will be our next president. Five of the past six elections following two-term presidencies have resulted in a switch in political party, which would favor Donald Trump. Stocks in all five of those years experienced a negative return. So far, stock market returns are mildly up for 2016, which would favor Hillary Clinton.

It is still too early to tell which historical trend will play out in November; however, if the Dow rallies or corrects in October, it could favor one candidate over the other. One thing is clear if you are connected to the major news networks: this is a very emotional Presidential election. The negativity will most likely pick up in October. Stocks do not typically stay range-bound for very long. With stock market valuations at historic highs, we continue to monitor company earnings reports. The last five quarters, US companies have experienced declining earnings as a whole. If this trend can change with better than expected company earnings, we can finally break out of this range to the upside. If earnings remain muted, so will stock market returns.

Questions or comments on this month’s financial market analysis? Leave a comment below and we will respond.