Weekly Economic & Market Recap

May 20, 2016The Weekly

Earlier this week the Federal Reserve released minutes from their April 26-27 meeting. The tone of the deliberations at that policy meeting suggests that Fed officials are more likely to increase short-term rates than most market participants expected. Traders had expected the probability of an increase at only around 4%, but expectations after the Fed release have risen to 34%. Equity markets, both in the U.S. and globally, sold off along with bonds. The U.S. dollar strengthened as higher rates should attract capital flows. Despite the market's reaction, if the Fed does increase rates and they are correct on their assessment that the economy is strong enough to warrant an increase, it would validate our expectation that better earnings are ahead looking forward into 2017. Currently, corporate America is not sharing the Fed's optimism. Companies would rather return cash to shareholders (and pay effective tax rates over 50% for many investors) than invest back in their businesses. Dividend metrics are a positive indication that stocks are reasonably valued. More than 35% of S&P 500 companies have a higher dividend yield than a current yield on their corporate debt. Persistent sluggish growth has weakened the confidence of both corporate America and investors. We believe the Fed will ultimately prove to be right that the domestic economy will regain its footing.