Speculation over potential changes in the language of the Fed’s policy statement is making next week’s Fed meeting perhaps the most anticipated of the year. There is growing speculation that the Fed will drop the “considerable time” language from its statement describing how long it will maintain its 0% interest-rate policy.
For the week, the S&P 500 fell -1.10%, the Dow Jones Industrial Average lost -0.87%, and the MSCI EAFE (developed international) dropped -1.27%.
Here are the 3 stories this week that rose above the noise:
Economists React: China August Industrial Growth Hits Six-Year Low
Emerging-market equities have outperformed their developed counterparts year-to-date. However, analysts are growing concerned about the persistence of this outperformance. And, recent economic data from China is starting to raise red flags. The country’s industrial output rose 6.9 percent in August from a year earlier, the slowest growth since the 2007-2009 recession.
Other indicators, including property, investment and retail, also point to an economy that looks much worse than some had expected. The question is how the government will respond to slower economic growth. Possible measures include interest-rate cuts, as well as structural and financial reforms.
Companies’ Stock Buybacks Help Buoy the Market
An article from The Wall Street Journal points out that companies are buying back their shares at the briskest pace since the last financial crisis, helping fuel the ongoing bull market and providing support during stock market downdrafts. According to Barclays, companies in the second quarter spent 31 percent of their cash flow on buybacks, the most since 2008 and up from 14 percent at the end of 2009.
Record earnings and high cash balances are driving the share buybacks. At the end of the second quarter, non-financial companies in the S&P 500 index held $1.35 billion of cash, down slightly from an all-time record of $1.41 billion at the end of last year, according to FactSet. Companies have become more strategic with the timing of the purchases, preferring to buy when share prices fall, and as a result, limiting share-price declines.
Big Issues a Strong Warning about Market Ebullience
Heading into tomorrow’s Fed policy statement speculation has been high that a change in the statement’s language will signal a more hawkish stance. Although some recent economic data has been surprisingly strong, some moderation in closely watched labor market and inflation data does not create a clear-cut case for a more hawkish Fed. If there is a change in Fed language, the motivation may be due to concerns over signs of excessive risk taking in financial markets.
A recent article from Institutional Investor summarizes a recent warning from the Bank of International Settlements, regarded by many as the central bank for central banks, that there are many signs of investors reaching for yield and becoming overly complacent about the path of future interest rates. If the Fed does shift to a somewhat more hawkish tone in the coming months, concerns such as those mentioned in the article are likely to be the motivation.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
