Investment Commentary – March 19, 2015
Dow – 18,076.19 (3/18/15 close)
S&P 500 – 2,099.42 (3/18/15 close)
Nasdaq – 4,982.83 (3/18/15 close)
10-year Treasury – 1.95% (3/18/15 close)
- The Federal Reserve today set the stage for its 1st interest rate hike since 2006 signaling its confidence in the U.S. economy. Yet the Fed slightly downgraded its economic outlook, saying that growth “has moderated somewhat.” It said it will raise its benchmark short-term rate, now near zero, only when the labor market improves further and inflation prospects pick up from the current meager pace.
- The Fed removed the word ‘patient’ from its latest policy statement today but said there would be no rate hike in April. Fed Chair Janet Yellen said the language change did not indicate a June rate hike was coming either, though she said it could not be ruled out.
- The rise of the U.S. dollar in recent months should slow economic growth by boosting imports and reducing exports. While the U.S. is a consumption-led economy and greater buying power feels good to the consumer, as a nation we still import over 16% of what we consume and export more than 13% of what we produce.
- With the European Central Bank’s (ECB) quantitative easing program now in full swing and investors anticipating a greater likelihood of a rate hike by the U.S. Fed, the dollar’s ascent is accelerating. (The ECB’s bond buying lowers yields in Europe, increasing demand for U.S. securities and thereby raising the value of the dollar versus the euro.) The Dollar Index is now at a 12-year high, up roughly 25% from last year’s lows. In contrast, U.S. stocks are essentially flat year-to-date.
- A stronger dollar is creating a problem for U.S. exporters. Adding to the challenge, this is occurring at a time when U.S. valuations are expensive relative to other developed markets.
- Equity markets continue to be driven by 2 interconnected trends: diverging monetary policy (Fed looking to hike rates).
- With U.S. consumer discretionary companies outperforming the rest of the market year-to-date, this sector may be vulnerable if sales do not start to accelerate, particularly as it now has the 2nd highest valuation(behind health care) of any of the 10 broad recognized economic sectors.
- Analysts continue to like Technology and Healthcare
- In fixed income analysts like high yield.
The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.