Market Perspective for May 1, 2015

The Federal Reserve decided to shorten its policy statement this week and discussed the creation of a system that would allow the Fed to do a press conference at any meeting. Currently, the Fed has press conferences only at selected meetings. Since the Fed likes to explain policy changes to the public, those press conference dates are the ones investors zero in on for any changes. A new teleconferencing system will allow the Fed to address reporters at any meeting or in between meetings when there are surprise rate hikes or rate cuts. Overall, the market interpreted the Fed’s moves as indicating a desire to hike rates unexpectedly.

Also contributing to rising interest rate expectations was an article by Jon Hilsenrath in The Wall Street Journal, a reporter with a direct line to the Fed’s policy makers. His article, out the day of the Fed’s policy statement, explained that the Fed views slow growth in the first quarter as a blip. On Thursday, weekly jobless claims hit their lowest point since the peak of the technology bubble in April 2000. Since the employment rate is one of the main factors driving Fed policy, the strong number caused investors to sell bonds on Thursday.

This week the Bureau of Economic Analysis put out its initial estimate of first quarter GDP growth. At 0.2 percent, it was right in line with the Atlanta Federal Reserve number we watch. The economy was helped by the buildup of oil inventory (additions to inventory add to GDP) and consumer spending. Exports and imports were a drag on GDP growth as the stronger U.S. dollar reduced the former and increased the latter.

Earnings were mixed this week. On the plus side was Apple (AAPL) and Gilead (GILD), but social media stocks were dinged by misses from Twitter (TWTR) and LinkedIn (LNKD). The rise in interest rates weighed on dividend shares and rate sensitive shares. Investors have also been selling market leading sectors such as biotechnology and small-caps in recent days. The S&P 500 Index is down about 1 percent for the week in early Friday trading, while the Nasdaq is down about 2.3 percent and the Russell 2000 is off 3.4 percent.

Weakness in equities wasn’t concentrated in the United States. The German market fell 3 percent this week as the euro advanced against the U.S. dollar. Oil prices pushed up to near $60 a barrel, helping the energy sector rally. As of Friday, it was the only S&P sector that was up for the week. Healthcare was down about 3 percent, due to the pullback in biotechnology and pharmaceuticals, two sectors that have had very strong performances in 2015.

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