Federal Reserve & the Strength of U.S. Market

U.S. markets enter into the sixth year of a bull market which started on March 09, 2009. Even with the geopolitical tensions in Ukraine, the abnormally poor winter weather, and looming interest rate increases the markets managed to show economic growth in the 1st quarter.

Since Janet Yellen began as chairwoman of the Federal Reserve in February, she announced her intentions to begin cutting the Reserve's bond buying program (stimulus) with a goal to be complete by year-end stating, "We expect to continue reducing the pace of purchases in measured steps." Many wonder what effect "Tapering" will have on the U.S. economy and namely how it will affect inflation and subsequent interest rate movement. Since December, the Federal Open Market Committee has cut monthly bond buying from $85 billion to $65 billion. Investors have become accustomed to low interest rates and in response the Fed has said it wants to see unemployment fall to around 6.5% or inflation rise to as high as 2.5% before they will be ready to raise rates. As of February, the current unemployment rate is 6.7%, which is the lowest it has been since November 2008. It is also important to note that short-term unemployment rates are hovering around 4.2%, which is the lowest since April 2008. Inflation dropped to 1.13% in February. If we continue on this path, it would make sense that we would see some sort of interest rate movement by year end.

With the Fed bond tapering set to continue through March, investors can conclude that the Fed sees domestic markets in a healthy position. The IMF (International Monetary Fund) projects GDP (Gross Domestic Product) to increase 2.8% this year, compared to 1.9% in 2013. Even with the winter weather conditions, we have seen manufacturing increase by 6% in February and expect to see additional increases as we pull out of the winter season. Payroll and discretionary spending has increased in the 1st quarter with average hourly earnings climbing by 9 cents or .4% which is the largest increase since June.

Although it is improbable to continue an upward momentum forever, numbers indicate that we haven't seen the last of this bull market. Warren Buffet in his letter to shareholders stated, "Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country's present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America's best days lie ahead."

Well said, Warren.

- Ali Criss, CFP®