Flash PMI, The Fed, and record highs in U.S. equity markets

In this week’s video update:

  • Flash PMIs show a strong Europe and mediocre U.S.
  • The Fed’s meeting minutes point toward a June rate hike.
  • The S&P 500®  had a record week. Why’d it happen and what’s it mean?

Flash Purchasing Manager Index (PMI) data came out for Europe, the U.S. and Japan this week. Which market is winning?

In this week’s episode of Market Week in Review, Senior Investment Strategist Paul Eitelman joined Sophie Antal Gilbert, program director, advisor insights. They began by pointing toward the Flash PMIs that came out this week for Europe, the U.S. and Japan. Eitelman stated that Russell Investments strategists like these estimates of the manufacturing PMIs, as they provide a quick look at the health of the global economy.

These flash PMIs showed divergence between European and U.S. data for the month of May. The European flash PMIs are still at a six-year high, consistent with very strong growth. In the U.S., the flash PMIs showed a small step back in the manufacturing data in May, indicating that the U.S. economy hasn’t taken off like the rest of the world. Eitelman stated that the U.S. economy looks stuck in mediocrity.

Fed meeting minutes point toward June

The U.S. Federal Reserve (Fed) released the minutes of its latest rate-setting meeting earlier this week. Eitelman called out two important components. The first component was their message that an interest rate hike would be appropriate soon. This is likely based on the low (4.4%) U.S. unemployment numbers and strong U.S. financial markets. Russell Investments strategists still expect a rate hike at the June Fed meeting.

The other component was more detail on their balance sheet outlook. Eitelman stated that the Fed has a balance sheet of over US$4 trillion in assets it holds—a consequence of the quantitative easing from earlier years, when the Fed stepped in and bought treasuries and mortgage-backed securities. In their meeting minutes, the Fed indicated that they will not actively sell those bonds. Instead, as the bonds mature, the Fed will no longer reinvest that money and just let the balance sheet very slowly and passively unwind. Eitelman said that as long as the Fed is smooth about this process, it is unlikely to cause much market volatility.

What’s behind the S&P 500Ò record highs?

This week’s episode closed out with a few comments on the S&P 500’s record highs this week. Eitelman suggested that the cause was strong performance from a relatively small number of large cap tech stocks. As there was not a lot of breadth to these gains across other U.S. equity market sectors, and as U.S. equity valuations still seem very high, our strategists continue to view this market with caution.

Watch the video now.