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Market Recap – Euro Central Bank Drives Continued Stock Gains With Lower Rates

Market Digest – Week Ending 3/11

Stocks continued their attempt to claw their way back into positive territory for 2016. The S&P 500 gained 1.1%, up for a fourth consecutive week. The index is now down just 1.1% for the year. International stocks closed the performance gap. The FTSE All World ex US index is now down 0.9% for the year. Emerging markets are positive. Gains this week were driven by greater than expected stimulus from the European Central Bank cut its main interest rate to 0% and cut its bank deposit rate to -0.4%. It also increased the amount of monthly bond purchases to 80 billion euros.

Weekly Returns:

S&P 500: 2,022 (+1.1%)
FTSE All-World ex-US: (+1.7%)
US 10 Year Treasury Yield: 1.98% (+0.11%)
Gold: $1,250 (-0.7%)
USD/EUR: $1.115 (+1.3%)

Major Events:

  • Monday – Iron ore prices jumped 20% on speculation China will stimulate its economy.
  • Tuesday – Ten year Japanese bonds hit a record low yield of -0.1%.
  • Tuesday – Bernie Sanders unexpectedly won the Michigan primary, keeping his hopes alive, while Donald Trump cemented his lead. Marco Rubio fared particularly poorly.
  • Wednesday – Toshiba said it would enter exclusive talks to sell its medical device unit thought to be worth around $6 billion.
  • Thursday – ECB president Mario Draghi announced a bold easing package, lowering rates and increasing asset purchases. He also said he did not expect to cut rates again which reversed initial losses in the euro.
  • Friday – The IEA said oil prices may have passed their bottom and said non-OPEC production is likely to fall by 750,000 barrels per day this year, more than previously estimated.
  • Friday – Ben Carson endorsed Donald Trump for President.

Our take:

From 2009 through 2014, the Fed implemented a number of powerful and innovative stimulus measures. It lowered interest rates close to zero and bought $4.5 trillion in assets, or roughly $15,000 for every American. The long term implications won’t be known for years but the actions most likely helped the country emerge from the recession following the sub-prime crisis. They also drove up valuations for assets like stocks, bonds and real estate.

In those five years, the S&P 500 gained around 150% while international stocks rose about 60% in dollar terms. While this kind of spread is by no means unprecedented in either direction, it was sizable. Now, a full seven years after the height of the sub-prime crisis, the ECB is acting a lot like the Fed did previously. There is no way to know the future, but especially with more attractive valuations overseas, one could make a solid bullish case for international equities. We don’t try to time these moves, but we do believe in maintaining a diversified approach including about a third of equity holdings outside the US.    

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