The Fed Reassures, The Market Responds

The dog days of August arrived two months early as trading volumes on major exchanges slowed in an apparent response to the start of the World Cup in Brazil. Whether the early departure of some of Europe’s top teams in the preliminary rounds spur brokers to return to business-as-usual before the final game remains to be seen. Meanwhile for most of June, U.S. markets hummed along with few bumps in the road. Here’s an overview of the major trends and talking points.

On June 18, the Federal Reserve Open Market Committee delivered news that reassured investors, some of whom were surprised by recent reports of inflation figures in May that hit a high for the past 12 months. Investors liked what they heard from Yellen – a steady, deliberate course ahead, and they were further heartened by reports that showed manufacturing staying strong and unemployment claims declining.

In response, stocks reached new highs, pushing the Dow Jones Industrial Average and Standard & Poor’s 500 indexes as well as the S&P’s Mid-Cap 400 index into record territory, enabling the NASDAQ index to surpass the 14-year high it hit in March. Prices declined toward the end of the month, probably in response to perceived weakness in the European markets, but the downturn was reversed days later.

What did Chairwoman Janet Yellen say that buoyed investor confidence? The Fed delivered no surprises, announcing that it intended to trim its monthly purchases of long-term Treasuries and agency mortgage-backed securities, but reassuring investors that the short-term interbank lending rate would remain at 0 percent to 0.25 percent “for a considerable time after the asset purchase program ends.” Nipping inflation worries in the bud – Yellen noted that inflation rates remain within the Fed’s target range, despite a 0.4 percent increase in May – she also described the economic decline in the first quarter as a hiccup, and said there were many reasons why we should see a period of sustained growth.  Specifically, she identified easier credit, an improving job market, rising home and stock prices, as well as less drag from federal fiscal policy as key factors in our economic rebound. Chairman Yellen also addressed concerns that the current policy of low interest rates could generate unhealthy speculation in the stock and bond markets. She acknowledged that the Fed is paying attention, but pointed out that this issue is not shaping monetary policy in an important way right now.

As further evidence of increasing economic confidence, the United States is seeing the market for initial public offerings heating up with 135 IPOs conducted this year and an additional 200 IPOs filed waiting to go public. These numbers represent a significant increase over last year, with IPOs up 65 percent over 2013, and filings up more than 85 percent. Not only are these numbers healthy, but we are also seeing a return to greater variety in IPO offerings, including startups in technology that represent opportunities for investors who are not risk-averse.

The above is intended as general commentary and is not intended to replace specific advice from professional tax and investment advisors.

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