This week the Federal Open Market Committee left interest rates unchanged.  This was the expected action for the June Fed meeting.  Wall Street will now focus on corporate earnings, which will begin the week of July 3rd.  There have been an unusually large number of companies that have  “pre-warned” that their earnings will be lower than expected (Unisys, Proctor and Gamble, Honeywell, Qualcom).  It is still expected that this earnings period will have many standout reports.  If anything positive can be drawn from the many pre-warnings, it is that expectations have been lowered for the remaining companies.  (All indices are unmanaged.  The S&P 500 is made up of 500 common stocks representing major U.S. industry sectors.  The Russell 2000 is a small cap index which track returns of the smallest 2000 firms in the Russell 3000 index.)

The Dow Jones Industrial Average is now at 10,398 and is down 9.6% year to date.  The Nasdaq closed at 3,877 and remains underwater by 4.7% for the year.  Broader averages such as the S&P 500 and the Russell 2000 are doing a little better, with the S&P 500 down 1.8% and the Russell 2000 actually positive by 1.6% year to date.

According to Lipper Analytical Services, the average stock mutual fund is positive by 2.0%, which trails the performance of the average money market fund of 2.7% year to date.  The top five sectors ranked by performance so far this year are Biotechnology, Real Estate, Natural Resources (energy), Small Cap, and Technology.  The sixth best performing category is Money Market.

The stock markets continue to be stuck in a trading range.  Some analysts expect that strong second quarter earnings will propel the markets higher throughout July and possibly take us toward the top of the recent trading range.  It will not be too long though before focus turns from earnings to the August Federal Open Market Committee meeting, where again a decision on interest rates will be made.  The markets will have a difficult time breaking out of the trading range until it is perceived that the U.S. economy is slowing and therefore the last interest rate hike is nearby.

The combination of good earnings and a “hostile” Federal Reserve can make for a very volatile market.  In this investment environment it is very important to consider having diversification into some of the more defensive categories.