Dovish Fed Trumps Greek Drama

The Dow Jones Industrial Average (Dow) added 0.64%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.77%, the Standard & Poor’s 500® Index (S&P 500) finished up 0.75% and the Nasdaq Composite Index (NASDAQ) tacked on 1.30%.


June 19, 2015    |    By Mike Schwager

Performance for Week Ending 6/19/15:

The Dow Jones Industrial Average (Dow) added 0.64%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.77%, the Standard & Poor’s 500® Index (S&P 500) finished up 0.75% and the Nasdaq Composite Index (NASDAQ) tacked on 1.30%. Sector breadth was positive with 8 of the 10 S&P sector groups finishing higher. The Healthcare sector (+2.01%) led the way higher followed by Consumer Staples (+1.92%) and Consumer Discretionary (+1.57%).

Index* Closing Price 6/19/15 Percentage Change for Week Ending 6/19/15 Year-to-Date Percentage Change Through 6/19/15





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 6/15/15-6/19/15

The major market indices finished the week moderately higher after the Federal Reserve reiterated that the path of higher interest rates will be very gradual. Adding to the positive tone was data showing the economic recovery continues to rebound from the first quarter soft patch. The ongoing Greek debt drama was more or less shrugged off as US investors appear to be suffering from “Greek fatigue”.

As expected last week’s Federal Open Market Committee (FOMC) meeting, ended with no change to monetary policy. The take away from the meeting was that lift-off would likely occur sometime later this year and that the path of higher rates would be very gradual. In the follow-up press conference, Fed Chair Yellen made it clear that the hiking cycle would not look like 2004 when the Fed raised rates at 17 consecutive meetings by a quarter percent each time. Yellen said that there would be no “mechanical” increases and that monetary policy would remain very accommodative even as rates begin to rise.

The meeting was certainly not a game changer; however, it was always viewed as being more of a “signaling” event than an action event. The economic assessment was upgraded slightly, with the committee stating that economic growth has been “expanding moderately” compared to “slowed” in the prior statement. On the labor front, they acknowledged that the pace of job gains had “picked up” (vs. “moderated” in March statement). In March they said growth in household spending “declined,” whereas household spending is now seen as “moderate”. The committee also stated that the housing sector has shown some improvement and energy prices appear to have stabilized.

In terms of the path of rates (the so called “dot-plot”) – even though the year-end median projection for the fed funds rate was unchanged at 0.625%, the makeup of the dots was somewhat more dovish. This meeting showed that seven committee members expected zero to one hike by yearend (two said no hike, while five are forecasting only one 25 basis point increase ). In the March statement, a total of three participants expressed a similar view. In addition, the projected path for both 2016 & 2017 were each lowered by a quarter percent.

All in all, the Federal Reserve appears to telegraphing that the economic environment is firming enough to begin raising rates later this year. In addition, while the lower forward rate path signifies a more dovish outlook for the longer term, the FOMC statement clearly elevates the odds that lift-off will occur at the September meeting, the first rate hike in almost a decade.

Fears surrounding the debt situation in Greece remain, although US investors appear to have entered into a period of “Greek-fatigue” as the situation has been mostly shrugged off as of late. The US economy has very little exposure to Greece and a default or exit from the Eurozone would likely have little impact. The situation in Greece is much different than it was a few years ago, when the bulk of Greek debt was owned by private institutions (banks). Today, most of the Greek debt is held by public institutions (IMF, ECB, etc) that are better positioned to handle a default. In addition, the European Central Bank would likely ramp-up their monetary efforts to help stem the tide if a default/Grexit were to occur. This suggests fears of “contagion” and comparisons to a “Lehman” like event may be overstated. The real fear of Greece exiting the Eurozone is the potential for other countries to join the fray. There are regions in Italy, Spain and Portugal who have expressed their desire to leave the monetary bloc. Neither ECB President Draghi or German Chancellor Merkel likely wants to have the unraveling of the Eurozone as part of their legacy. While the negotiations are ongoing and nearing various deadlines, an eleventh hour compromise still feels likely – stay tuned.

Earnings: Q1 Wrap-up
All 500 of the S&P members have now reported Q1 results. According to Bloomberg, Q1 earnings advanced by 0.7% (up 7.8% ex-Energy), well ahead of the nearly 6 percent loss forecast at the beginning of the quarter. Second quarter earnings reports will begin to drip out over the next few week and as with the first quarter, analysts have a gloomy outlook for Q2, with earnings currently forecast to dip by 6.6%. The silver lining is that the bar has been set very low, leaving plenty of room for upside surprises.

The Week Ahead:
The focal points of the upcoming economic calendar will be the May existing home sales report on Monday followed by May durable goods orders and May new home sales on Tuesday. Other reports of interest include the June Markit PMI manufacturing index, the final estimate of first-quarter GDP, and the University of Michigan’s June consumer sentiment survey. While second quarter earnings season won’t officially begin for a few more weeks, there are a handful of “early-reporters” on the calendar. The list includes Dow-component Nike, the first member of the Dow to report Q2 results. The Fed speaking calendar is relatively light with only Fed Governor Powell and Kansas City Fed President Esther George scheduled to speak.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm’s headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor’s 500® Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

Past performance is no guarantee of future results. Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.


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