Friday’s disappointing jobs report all but erased chances of a Fed rate hike in June, in our view. We now expect the Federal Reserve to hold rates steady at their two-day monetary policy meeting, which ends on June 15. Yet we don't expect the FOMC to remain on the sidelines for long. Another round of data will likely indicate that the economy is still on track for moderate growth. Also, we think the lifting of the Brexit uncertainty by then will allow the Fed to raise rates in July.
Government data is notorious for experiencing substantial subsequent revisions, and the weakness seems to be inconsistent with S&P Global Economics’ greater than 2% GDP growth estimates for Q2 through Q4. Therefore, we think the Fed will likely raise rates at the July meeting. As a result of the delay in the next Fed rate hike, investors shouldn’t throw caution to the wind by “yielding to temptation” and purchasing stocks based on dividend yield alone. We think the payout ratio is also an important indicator of investment attractiveness. Finally, should the S&P 500 post a positive return in June, don’t assume that the traditional May through October market weakness has been called off. Indeed, since June has recorded the second lowest frequency of starting declines of 5% or more, the probability typically rises once we are in the August through October timeframe.