A mixed week fundamentally produced modest gains in both stock and bond markets, two moves that seem somewhat at odds with one another – investors buying stocks and safe-haven bonds simultaneously. The FOMC mid-week meeting was the primary focus of market participants last week. No Fed surprises were delivered which is always appreciated by the market. Friday, Amazon delivered a ‘shot heard round the mall’ as a reminder that things once thought ‘unamazonable’ become ‘amazonable’ with their $13.7b acquisition announcement of Whole Foods Market.

Weekly Anecdotes:

  • As expected, the Fed raised its policy target by 25bp this week to the 1%-1.25% range, despite recent weakness of core inflation, which they expect will rebound later this year. The Fed’s plan is to raise rates once more in 2017, three times in 2018, and begin shrinking their $4.5t balance sheet. Of note is that the market is once again, calling their bluff, pricing in no additional hikes for 2017 and placing only a 33% likelihood of another 25bp hike this year.
  • The Fed began publishing changes to the Fed Funds rate on the day of the meeting in 1994. Since then, the S&P 500 has averaged a decline of 0.7% in the month following a 25bp hike, as the market absorbs the incremental higher cost of capital.
  • The Fed will begin reducing the size of their balance sheet by curtailing the reinvestment of principal received from maturing bonds in their portfolio. The ‘run off’ is set to begin later this year at a pace of $10b monthly increments up to a ceiling of $50b per month. This is a relatively trivial amount and was smaller than expected which the bond market certainly appreciated.
  • Since June 8th, the market has rotated out of what HAD been working on the year (mega cap, tech, high P/E, international revenues) into the areas that HAD NOT been working on the year (small cap, low P/E, high dividend, U.S. revenues).
  • Sector dispersion this year has been fairly pronounced with strength in tech +18.0% and healthcare +13.7% and weakness in energy -10.6% and telecom -7.2%.
  • Breadth of the stock market remains pretty-strong with ⅔ of the S&P 500 stocks trading above their 50 day moving averages.

Economic Updates:

  • Economic surprises… U.S. Citi Economic Surprise Index has plunged to levels not seen since August 2011 thanks to continued weak economic reports relative to expectations. It should be noted however that absolute levels of economic activity remain constructive. The Citi Economic Surprise Index for Europe, Japan, and Emerging Markets have softened to a lesser extent.
  • Retail sales… Consumer spending as measured by retail sales was weak in the first quarter and didn’t show any signs of improvement last month. May retail spending fell 0.3%, meaningfully lower than consensus estimates which called for 0.1% growth.
  • Inflation… May inflation numbers remained soft thanks to falling pharmaceutical and cellular phone package prices. May’s headline CPI fell 0.1% to an annual rate of 1.9% while core CPI grew only 0.1% – a 1.7% annual rate.
  • The housing market has been a consistent source of strength throughout the recovery/expansion. However, over the past month, most housing market indicators have missed estimates meaningfully to the downside. Last week, disappointing housing starts and building permits added to that list.