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Stocks Mixed, Fed Changes Policy

September 25, 2017 at 2:11 PM

 

Domestic indexes were mixed last week, as the Dow gained 0.36%, the S&P 500 eked out a 0.08% increase, and the NASDAQ lost 0.33%.[i] International stocks in the MSCI EAFE added a solid 0.68%.[ii]

 

Three stories that have dominated conversations and driven investor attention in 2017 continued last week:

  • Healthcare policy: The Senate’s continuing discussion of healthcare reform impacted stock performance in connected industries.
  • Tension with North Korea: The markets responded quietly to continuing conflict between President Trump and Kim Jong Un, although some investments saw a bump later in the week.[iii] 
  • Interest rate updates: While the Fed chose not to raise interest rates in its most recent meeting, it indicated that a December hike is definitely still on the table.[iv]

When announcing its latest interest rate perspectives, the Federal Reserve also indicated that it would begin to reduce its balance sheet next month.[v]

But, what does that really mean—and why does the Fed have a $4.2 trillion balance sheet, anyway?

 

A Look Back on Quantitative Easing

During the financial crisis and recession, the Fed took an unprecedented and controversial approach to stabilizing our economy and the world’s markets. By buying trillions of dollars of Treasury and mortgage bonds between 2008 and 2014, it aimed to encourage hiring, economic growth, and investing. This action is commonly known as Quantitative Easing (QE).[vi]

Through the three rounds of QE, the Fed added trillions of dollars of new money to the financial markets. Since QE first began almost a decade ago, we have seen unemployment reach a 16-year low and the S&P 500 more than triple from its bottom in 2009. Although economic growth is still slower than before the recession, the Fed believes the economy is now strong enough to handle more normal monetary policy.[vii]  

In October, the Fed will start the gradual process of lowering its balance sheet—currently equal to about a quarter of Gross Domestic Product (GDP). Thus far, investors have had a mild response to this plan. As the Fed begins slowly allowing billions of dollars of bonds to roll off, we will closely monitor the economic impact.[viii]

We know that monetary policy can seem like an incredibly complex topic—and, frankly, it is. However, we think you deserve to understand the large forces at play in your financial life. If you have any questions about the Fed’s latest announcement, or any other financial details, we’re always here to talk.

 

ECONOMIC CALENDAR

Tuesday: New Home Sales, Consumer Confidence
Wednesday: Durable Goods Orders

Thursday: GDP

Friday: Personal Income and Outlays, Consumer Sentiment

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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia and Southeast Asia.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

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