Recent economic data reports have helped to fill in the picture of the economy in the first half of the year. However, investors should be more concerned with the prospects for the second half of the year.
It is interesting how quickly market narratives can change. Just a month ago the “consensus” was the economy was expanding, market complacency reigned, and the stock market would just keep going up.
Heading into the second half of the year, there are a number of key policy uncertainties in Washington. For the Fed, a clear near-term picture is a contrast to the longer-term outlook where views of the market and the Fed have diverged.
This is an exciting time to be an investor, but it’s also a very uncertain one. Risks to both the upside and downside are much higher than they were even a year ago.
The June 14 Fed policy decision was expected to overshadow the mid-month economic figures. Instead, the soft data reports contrasted with the relatively more upbeat central bank. Did the Fed make a mistake? Or are the financial markets placing too much emphasis on the short-term data?
The market odds of a June 14 Fed rate hike have risen in recent weeks. Another 25-basis-point increase in short-term interest rates is seen as a near lock.
The global economy continues to expand, corporate revenues and earnings are solid and, despite frothy valuations, the stock market continues to chug up “to 11” and beyond.
Investors need to be vigilant, as stocks and bonds are expensive, volatility is low, and risks lay ahead.
Political noise emanating from Washington has prompted fresh concerns that a US equity market correction may be looming. But have no fear: the market often takes a leg down, only to bounce back quickly.