Market Digest – Week Ending 3/18
Stocks moved higher Friday to cap their 5th straight week of gains. The S&P 500 gained 0.9%. The index is now down just 0.2% for the year. International stocks gained again this week and are now flat for the year. Emerging markets are positive. Gains this week were driven by an increase in the price of oil and cautious comments on future rate hikes from the Fed.
S&P 500: 2,040 (+0.9%)
FTSE All-World ex-US: (+1.0%)
US 10 Year Treasury Yield: 1.89% (-0.09%)
Gold: $1,255 (+0.4%)
USD/EUR: $1.128 (+1.1%)
- Monday – Output-freeze negotiations between oil producing nations ongoing, but disagreements on timing continue.
- Tuesday – U.S. Retail sales fell 0.1%. U.S. Producer prices fell 0.2% in February.
- Tuesday – Chinese companies continue foreign buying spree, agree to $102bn in deals year-to-date, vs. $106bn for all of 2015.
- Wednesday – The US Fed, concerned with lingering economic risks, signals caution on further rate hikes for 2016. Bond yields drop, equities rally.
- Wednesday – US Housing starts rise 5.2% in February.
- Thursday – Dow Industrials turn positive for first time in 2016, oil settles above $40/barrel.
- Friday – Markets rally to 5th straight week of gains. US consumer sentiment slips in March.
On Wednesday, the US Fed stood pat on benchmark bond rates and signaled fewer rate increases in 2016. Predictably, bond yields dropped and stocks rallied. Also predictably, the US dollar dropped against many foreign currencies, falling 1.1% against the yen and .88% against the euro. Historically, when any central bank acts to weaken bond yields and increase the availability of currency, the value of that currency on the global market generally drops.
However, what happens if every central bank pulls that same lever at the same time? Over the last few years, many of the world’s banks have been trying to weaken their currency and spur economic growth, with the result that many benchmark rates have been cut close to zero, and Japan and the Eurozone have even gone negative. This unprecedented race to the bottom has resulted in a de-facto tie, and it’s becoming obvious that previously potent monetary policies may no longer have the expected results in the future. For instance, the euro has appreciated over 4% so far this year despite further negative rate cuts, and the Yen has appreciated 8%.
The economic impact of global rock-bottom yields are unknown, and it remains to be seen whether policy makers will attempt increasingly radical measures in an effort to depreciate their currencies versus their peers. One interesting side effect has been that some US Treasury bond prices have not suffered as most analysts have expected, and instead have appreciated even in the face of rate increases by the Fed. We see this type of move as one more reason to stay diversified and not attempt to time asset price moves, even if most of the available evidence seems to point in a certain direction.