Fed To Raise Rates, But What's Next?

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

Markets were mixed last week as tech earnings out-performed, but financial sector woes resurfaced.  Overall, 53% of S&P 500 companies have reported Q1 earnings and the results are better than expected.  So far, 79% have reported earnings above analysts’ expectations and 74% have reported revenues better than expected.  These numbers are both above the 5-year and 10-year averages.  Communication Services and Technology have been the largest contributors to out-performance in earnings this quarter.  Several key earnings by some tech and communication services bell weathers last week showed a rosier outlook than the market expected.  On the flip side, renewed concerns about the banking sector resurfaced last week when First Republic came under scrutiny.  In fact, just this morning it was revealed that JP Morgan will purchase the assets of First Republic Bank, marking the 3rd bank to fail this year.  The market seems to approve of the deal as J.P. Morgan’s stock is higher post-announcement. 

The big news this week will be the Fed’s rate decision (90% probability of a 25 basis point rate hike).  Investors will be mostly concerned about future guidance from Powell on rates moving forward.  We renew our objection to further rate hikes and believe the Fed should pause now.  However, economic data is proving somewhat resilient and consumers are continuing to spend as the labor market is on solid footing.  The old investing moniker, "Sell In May And Go Away" doesn't hold up very well in reality.  Since 1985, the month of May has turned out to be positive 76% of the time, with a median return of +1.22%.  The Nasdaq, typically a more volatile index, has provided positive results in May 68% of the time and has a median return north of 3%.  Expect choppy trading this week as the market digests the Charmain Powell's comments on Wednesday.

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