The S&P 500 fell 1.3% on the week with the bulk of the drop following the Federal Open Market Committee (FOMC) interest rate decision. Domestic small caps outperformed large caps on the week, but foreign equities underperformed. The dollar rallied, gold dropped, and the Barclays Aggregate Bond Index eked out a small gain.

The FOMC lowered interest rates by 25 basis points on Wednesday. This meeting did not include summary economic projections, which are done quarterly. The FOMC ended their balance sheet reduction, dubbed quantitative tightening, a couple months early. Two voting members dissented in favor of no cut. The press conference, which now occurs after every meeting, highlighted the FOMC’s view of a strong economy and that a lasting easing cycle is not necessary. As noted before, the Fed remains reluctant to aggressively front-run the deceleration in the economy. While not nearly as impactful as the December FOMC meeting, which saw equities collapse into Christmas Eve, this press conference had the tone of the Fed wanting to walk back aggressive market expectations. Equities dropped substantially in the initial minutes, but regained ground to lose about 1% on the day. Possibly the most important thing to watch going forward is the dollar, which rallied to a two-year high versus the Euro after the press conference. A strong dollar rally from here would likely be a headwind to risk assets.

The first look at second-quarter GDP was one of the better economic results for the week with growth of 2.1%, which was ahead of expectations. Consumer expenditures showed a nice rebound after notable weakness in the prior two quarters. Federal outlays exploded at an unsustainable 7.9% seasonally adjusted annual rate. Offsetting these two factors was the largest drop in domestic investment since 2015. Consumer confidence showed a nice bounce back as did private employment reported by ADP. On the negative side was the big miss out of the Chicago PMI, which fell to 44.4 with 50 being the expansion/contraction threshold on the diffusion index. On seven of the eight prior instances this occurred going back to 1970, a recession had already begun or was imminent. The lone exception was the last occurrence in 2015, but on this occasion the index jumped back above 50 the next month. As with many economic indicators, it is often the length of time they stay beyond a threshold that is more relevant than just touching and reversing. It will be important to watch how the manufacturing sector holds up in the coming months.

Contributed by | Justin Carley, CFA, Managing Director

Justin is a Managing Director, providing portfolio management and credit analysis for fixed income strategies. He also manages the firm’s multi-manager portfolio strategies and contributes to the asset allocation framework. Justin has more than 10 years of experience focusing on management, analysis and trading of fixed income portfolios. Previously, Justin was a fixed income portfolio manager at American Trust & Savings Bank. Justin has a bachelor’s degree from Truman State University, holds the Chartered Financial Analyst designation and holds a Fellowship in the Life Insurance Management Institute.

Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates.
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