Co-authored by Daniel Rangel
Jerome Powell, the new head of the Federal Reserve Open Market Committee (FOMC), made his first opening statements before Congress on Tuesday. The FOMC is the monetary policymaking entity of the Federal Reserve, and Powell is the successor to former chair Janet Yellen. The committee is responsible for making decisions on federal funds rate hikes, quantitative easing, and other policy instruments aimed at maintaining the economy’s stability and health.
In his statements, Powell explained that his “personal outlook for the [United States] economy has strengthened since December,” according to The Wall Street Journal. Prior expectations about interest rates included the possibility of three rate hikes in 2018, but Powell’s announcement that the economy is growing faster than expected may lead to expectations of a fourth rate hike. Investors analyze FOMC announcements under microscopes to search for changes in tone, language, or any other variability that may hint at changes in future policy. Powell’s announcement shocked investors and the markets, which ended down around 1.2% on Wednesday.
Uncertainty is not a friend of investors. When the outlook for the economy changes or even becomes brighter than expected, the markets react with a fear of uncertainty. If investors already priced three potential rate hikes into the markets, it makes sense that there was volatility on Wednesday as markets moved to include the potential for a fourth rate hike in the future.
Movements like Wednesday’s are indicative of market reactions to events (or lack thereof) that feed into behavioral biases of investors and overall risk aversion. If the fourth potential rate hike was priced into the markets on Wednesday, we should not see much movement when the Federal Reserve actually announces an increase in rates. Unfortunately, however, this is not always the case.
Sectors: Among the Sector Benchmark ETFs, the average momentum score increased from -2.55 to 1. The Consumer Staples sector was the only one that fell for the week, down 4 points. Tech increased the most, up 11 points. Defensive and cyclical sectors also increased. Sensitive sectors as a whole increased 26 points. The number of sectors in the red remained at five. Real Estate remains at the bottom, unchanged. The overall increase in sectors seems to indicate an appetite for risk.
Factors: Among the Factor Benchmark ETFs, the average factor score increased from 6.27 to 11.18 this week. All of the factors increased for the week. Momentum climbed the most, up 7 points. Dividend Growth increased the least, up 3 points. Yield still remains at the bottom, the only factor in the red.
Global: Global Benchmark ETF momentum scores increased for the week. The average score by country jumped from 7.64 to 11. Developing countries, such as Latin America, China, and Emerging Markets, were at the top of the list. The Pacific increased the most, up 7 points. Developed countries remained at the bottom. None of the countries decreased. The Eurozone, U.K., and Emerging Markets remained unchanged. Canada and the U.K. are the only countries in the red.
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