The Federal Open Market Committee (FOMC) press release wasn’t quite as catchy as España Cañí — the Spanish song played to rile crowds at events as varied as baseball games and bullfights — but it helped motivate investors as they pushed American stock markets higher last week.

The markets’ optimistic surge was a bit difficult to understand. Since April, the U.S. economy has offered mixed signals. As it turns out, the economy actually suffered a contraction — not a slight expansion, as was originally thought — during the first quarter of 2014. Unemployment has been relatively steady with employers adding about 200,000 jobs in each of the last four months.  However, inflation numbers have some pundits concerned.

The Bureau of Labor Statistics’ Consumer Price Index Summary (CPI) showed the CPI increased by 0.4 percent in May, but that doesn’t really tell the whole story. The price of food was rising faster (0.7 percent) than the CPI and in May, the food index posted its largest increase since August 2011. In addition, the cost of electricity and gasoline rose 0.9 percent.  When questioned about the discrepancy, Chairwoman Janet Yellen indicated the numbers around inflation could be just ‘noise.’  The Fed’s attitude toward inflation had The Guardian accusing it of magical thinking.

“…Consumers are surrounded by rising prices on all sides – paying higher bills, paying more money at the market, paying more just to get to work. At the same time we’re shelling out more for these necessities, our incomes are stagnant. No more money is coming in. Yet the Fed, which just wrapped a two-day meeting to diagnose the economy, is dismissing these real-world costs as a trick of the charts – a mere math problem rather than a real snapshot of the challenges facing Americans.”

If economic signals are mixed, why were markets so optimistic? Reuters suggested investors’ confidence had a lot to do with the markets’ resilience during 2014 to-date (in the face of events in Ukraine and the Middle East, among others), as well as economic improvement, earnings growth, and the availability of cheap credit.


Data as of 6/20/14

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

1.4%

6.2%

23.6%

15.4%

17.1%

5.7%

10-year Treasury Note (Yield Only)

2.6

NA

2.4

3.0

3.7

4.7

Gold (per ounce)

3.1

9.2

1.6

-5.3

7.4

12.8

DJ-UBS Commodity Index

1.3

8.6

6.6

-4.9

2.5

-0.7

DJ Equity All REIT Total Return Index

1.5

16.1

19.1

12.2

24.9

9.7

S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.  You cannot invest directly in this index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Sources:

[1] http://www.marketwatch.com/story/stocks-rise-as-witching-may-spark-volatility-volume-2014-06-20?link=MW_latest_news

[2] http://www.usnews.com/news/articles/2014/06/18/no-surprise-fomc-keeps-tapering-gives-no-detail-about-timing-of-rate-hike

[3] http://www.bls.gov/news.release/cpi.nr0.htm

[4] http://www.businessinsider.com/inflation-wall-street-vs-the-fed-2014-6

[5] http://www.theguardian.com/commentisfree/2014/jun/18/fed-janet-yellen-economy-inflation

[6] http://www.reuters.com/article/2014/06/21/us-usa-markets-fed-analysis-idUSKBN0EV0CH20140621

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