The Fed Remains Dovish with Accommodative Monetary Policy

If we reflect on some of the highlights from the month of April, there is very little to get excited about. For starters, major technology companies have missed the mark when it comes to revenues or EPS data. Despite all of the negative sentiment in the markets as a result of shoddy earnings from major technology stocks, the Fed gave investors a welcome reprieve. Before we explore the impact of Janet Yellen’s policy decision, let’s take a look at the recent performance of major tech companies from the Nasdaq (QQQ) and the S&P 500 Index (SPY):

• Twitter (TWTR) posted Q1 earnings of $0.15 with sales of $594.5 million. Analysts were anticipating EPS of $0.10 and earnings of $608 million. As a result, Twitter shares plunged 12% and the stock is currently trading at $14.86, down $2.89 or 16.28%.
• Microsoft (MSFT) posted its Q3 earnings recently, and while EPS and earnings were in line with consensus forecasts, the stock plunged from over $55.78 per share on 21 April to its current trading price of $50.94 per share, down 0.97% for the day 27 April. At current prices, Microsoft’s market capitalization is $400.41 billion. The company faces strong headwinds in the form of declining PC sales, 11,000 job losses at Intel and the poor performance of IBM. Based on generally accepted accounting principles (GAAP) Microsoft’s revenues of $20.5 billion have plunged 6% year on year ($21.73 billion in Q3 2015).
• Alphabet Inc. (GOOG) stock also plunged after posting its quarterly earnings reports. Declines of 5.32% were recorded, as actual earnings came in less than consensus forecasts, a strong dollar impacted on overseas earnings, and overall capital expenditures were dragging on the company’s bottom line. Net income for the quarter came in at $4.1 billion, up $0.6 billion from the same period a year ago. Wall Street was anticipating EPS of $7.96, while Q1 EPS was reported at $7.50. The stock is currently trading at $705.84, down $2.30 or 0.32%. Alphabet Inc. has a market capitalization of $484.77 billion.
• Apple Inc. (AAPL) earnings were the most anticipated of all the tech stocks and the company accounts for a large percentage weighting on the Nasdaq composite index. However, Apple Inc. disappointed badly with weak iPhone sales contributing to declining profitability and missed forecasts. The stock took a pounding on Wednesday, trading 6% lower, below the key $98 level. Guidance for Q3 is sharply lower, but Q2 revenues came in at $50.57 billion, while analysts were forecasting earnings of $52 billion. For Q3 revenues, the company has forecast its earnings sharply lower in the $41-$43 billion range, while analysts are anticipating $47.3 billion for Q3. Revenues for Apple plunged 13% year on year, and Apple remains the most valuable company on the market.

Janet Yellen Adopts Go-Slow Approach with Fed Rates

The decision taken by the Fed on Wednesday, 27 April 2016 is significant on several fronts. For starters, the Fed Open Market Committee (FOMC) decided to retain the federal funds rate at the current level of 0.25% – 0.50%, based on the improvement seen in the labor market. However, there has been a contraction in overall economic growth with weakness evident in household expenditure. Net exports remain sluggish, but the inflation rate is below the FOMC target range of 2%. This has largely been the result of weak energy prices which are preventing overall price rises from taking place.

Owing to all of these realities, the FFR will be retained in its current range to provide further accommodation in monetary policies. A gradual approach to raising interest rates is in effect, with a potential rate hike likely at the next meeting of the Fed in June, although analysts are expecting a rate hike closer towards the end of the year. Markets reacted positively to the Fed decision, given that interest rate hikes are detrimental to the performance of equities markets. Gold stabilized and gained, the USD held steady and oil prices hit a 6-month high after data from US inventory levels was released. Overall, the Fed decision was a solid buffer to the poor performance of major technology stocks, financial stocks and others.