June 25 2014
The Federal Open Market Committee (FOMC) press release wasn’t quite as catchy as España Cañí – the Spanish song played to rile crowds at events as varied as baseball games and bullfights – but it helped motivate investors as they pushed American stock markets higher last week.
The markets’ optimistic surge was a bit difficult to understand. Since April, the U.S. economy has offered mixed signals. As it turns out, the economy actually suffered a contraction – not a slight expansion, as was originally thought – during the first quarter of 2014. Unemployment has been relatively steady with employers adding about 200,000 jobs in each of the last four months. However, inflation numbers have some pundits concerned.
The Bureau of Labor Statistics’ Consumer Price Index Summary (CPI) showed the CPI increased by 0.4 percent in May, but that doesn’t really tell the whole story. The price of food was rising faster (0.7 percent) than the CPI and in May, the food index posted its largest increase since August 2011. In addition, the cost of electricity and gasoline rose 0.9 percent. When questioned about the discrepancy, Chairwoman Janet Yellen indicated the numbers around inflation could be just ‘noise.’ The Fed’s attitude toward inflation had The Guardian accusing it of magical thinking.
“…Consumers are surrounded by rising prices on all sides – paying higher bills, paying more money at the market, paying more just to get to work. At the same time we’re shelling out more for these necessities, our incomes are stagnant. No more money is coming in. Yet the Fed, which just wrapped a two-day meeting to diagnose the economy, is dismissing these real-world costs as a trick of the charts – a mere math problem rather than a real snapshot of the challenges facing Americans.”
If economic signals are mixed, why were markets so optimistic? Reuterssuggested investors’ confidence had a lot to do with the markets’ resilience during 2014 to-date (in the face of events in Ukraine and the Middle East, among others), as well as economic improvement, earnings growth, and the availability of cheap credit.
- Data as of 6/20/141- WeekY-T-D1-Year3-Year5-Year10-Year
- Standard & Poor’s 500 (Domestic Stocks)1.4%6.2%23.6%0.15417.1%5.7%
- 10-year Treasury Note (Yield Only)2.6N/A2.43.03.74.7
- Gold (per ounce) 3.1 9.21.6-5.37.412.8
- DJ-UBS Commodity Index184.108.40.206-4.92.5-0.7
- DJ Equity All REIT TR Index1.5220.127.116.11.99.7