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Markets gain ground, await further Fed guidance

F&M Investment Services - Raymond JamesClarksville, TN – July was certainly eventful in terms of market movements and economic news. Stocks were up for the month, with the S&P 500 posting its biggest monthly gain since January, making up for its decline in June.

All the major indices ended July in higher territory after housing prices posted their largest gain in seven years and the Commerce Department reported that advanced estimates show that gross domestic product grew more than forecast in the second quarter.

Of course, GDP figures often get revised either up or down, and that likely will be the case with this second quarter figure. It’s the underlying data that makes up the GDP figure that’s particularly important because it could impact how the Federal Reserve will respond after its next meeting in mid-September.

You may recall Fed Chairman Ben Bernanke indicated in mid-June that the Fed will dial down some of its support at the end of the year if the economy improves to certain levels. The markets reacted negatively following his comments, and investors are waiting for further guidance on future Fed actions. For now, the central bank has chosen to leave rates unchanged and to keep buying bonds.

However, Raymond James Chief Economist Scott J. Brown, Ph.D., believes “the markets have placed too much emphasis on the Fed tapering” when the board’s actions are dependent on underlying economic data.

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Brown writes, “While the GDP data tell us where the economy has been, they don’t tell us much about where things are headed. Clearly, the housing sector has turned the corner and is providing important support for the overall economy. However, fiscal policy has been a significant drag on growth. It’s likely that the fiscal drag will wane in the remainder of the year. However, nobody, including those at the Fed, is precisely certain about that.”

Thus far, the supporting data does seem positive as the majority of companies in the broad market S&P 500 are beating earnings expectations, according to FactSet; gross domestic product grew at an annual rate of 1.7 percent in the second quarter, more than economists had expected; and consumer spending has continued to climb.

In addition, preliminary employment figures show a larger increase than expected, but we won’t know the full jobs picture until we see the details of the government’s labor report in early August and another report that is expected just before the September 17th-18th Fed policy meeting.

Amid all this came other interesting news. One key aspect of healthcare reform was delayed for a year, giving employers extra time to offer affordable coverage to employees; rates on federally subsidized Stafford student loans doubled but are still the subject of pending legislation that may offer relief for students; and Detroit declared bankruptcy, the largest U.S. city to do so.

The city’s financial worries show that interest rate risk is not the only risk when investing in fixed income. If the news brought up concerns for you, know that I’m available to answer any questions you may have about this area of the market or any aspect of your financial plan.

Please feel free to reach out to me if you have any questions about recent economic data or the financial markets and how they may impact you. I look forward to speaking with you.


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