The end of last week’s trading session brought about mixed sentiment, with small suggestions of the bulls taking over this week. Overall, however, it is evident that the markets are showing some fatigue since the presidential election in November, seeing there was not much reaction to the monetary policy decision made by the Federal Reserve last week. Friday closed with the Dow Jones Industrial Average up by 24 points, the NASDAQ down by 14 points, and the S&P 500 Index up by less than one point.
In notable news last week, the Federal Reserve made a significant monetary policy decision on Wednesday afternoon, deciding to raise the federal funds rate by 25 basis points (from 1.00% to 1.25%). As mentioned earlier, the markets did not react much to this change, suggesting general fatigue among investors and reflecting the widespread anticipation of a rate hike. More significant than this decision was the news of the Federal Reserve’s intentions to begin reducing its $4.5 trillion balance sheet, by selling bonds to investors. With this in mind, bond prices are expected to decrease, while yields are expected to increase.
This statement did not produce an adverse effect on major indexes either, since most of the attention was placed on weakening consumer and producer prices. The retail sales report for the month of May was frankly disappointing, and housing starts and building permit data did not reveal optimistic figures either.
We should expect some insight on the current market situation this week; nine Federal Reserve presidents are expected to give speeches in the next five days. Hawkish undertones from these speeches would suggest that market valuations are a bit inflated, prompting some noticeable profit-taking over the next few weeks. Conclusions drawn from these speeches as well as the VIX (which ended last week at around 10, potentially signaling of an overbought market) will be scrutinized by both the bulls and the bears in the next few weeks.