posted on March 10, 2016 20:24
Stocks closed out the month relatively unchanged. The MSCI All Country World Stock Index fell 0.5% and the S&P 500 was down 0.1%. Job gains were strong for the month and the U.S. economy saw a much needed boost in inflation. Bond returns were mostly positive as yields declined. REITs picked up some steam with a 1.0% gain and managed futures had a very strong month, up 3.0%.
- The second estimate of fourth quarter real GDP was 1.0%. This is an upward revision from the initial estimate of 0.7%.
- The year‐over‐year inflation rate climbed to 1.3%. Increases in the indexes for shelter and medical care were the largest contributors.
- Job gains in February came in strong at 242,000 and beat expectations of 190,000. The unemployment rate remained at 4.9%.
- U.S. large stocks were near flat for the month, with the S&P 500 index declining 0.1%. U.S. small value stocks fared better with a 1.2% gain.
- International large stocks posted a loss of 1.8%, and international small caps declined 0.7%.
- Emerging markets were slightly down with a 0.2% decline. Returns in Brazil and Indonesia held up the index with 6.3% and 6.1% gains, respectively.
- The 10‐year U.S. Treasury yield fell to 1.7%, down from 1.9% the month prior.
- U.S. bond returns were positive as yields fell. Intermediate‐term bonds gained 0.5%, international bonds gained 1.5%, and TIPS were up 1.1%.
- Another strong month for managed futures (+3.0%) boosted their year‐to‐date return to 6.4%.
- REITs benefited from lower rates and gained 1.0%. Commodities fell 1.6%.
Interest Rates Head South
The Bank of Japan and European Central Bank are venturing into unusual territory. In an effort to boost growth and inflation, these central banks are experimenting with negative interest rate policy. Yes, that actually means that banks will have to pay to deposit their funds and accept a negative expected return. But what does this mean for the broader market?
While the intention is to rekindle the growth and inflation these countries need to jumpstart their economies, it could actually have the opposite effect. On one hand, lower rates increase borrowing and spending, which typically creates what is called “demand pull inflation.” But when rates go below zero, this can have the opposite effect if investors move to hoard cash rather than accept negative returns. An increased amount of cash being held outside of the banking system lowers the money supply, which would push inflation even lower.
In the latter case, these policies could lead to a weakening of the U.S. dollar. This would make U.S. exports more attractive and has the potential to boost U.S. economic growth. This could also increase international stock returns from a U.S. investor’s perspective as returns are converted back to the U.S. dollar.
While there is a wide array of opinions on the subject, no one can be entirely sure what effect this will have on the global economy, if any. But here in the U.S., the Fed’s decision to keep rates positive and the possibility of continuing to move them higher signal strength for our economy.
Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar Direct, Standard and Poor's, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch, wsj.com.