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Home>Daily Capital>Investing & Markets>Yellen Sets the Stage for Higher Rates

Yellen Sets the Stage for Higher Rates

Market Digest – Week Ending 3/21

The capital markets proved quite willing to transition Crimea to Russia. Stocks advanced on growing perception that Russia will not seek further territory and the West will not apply biting sanctions. Economic data such as higher than expected manufacturing activity also bolstered confidence. Fed Chairwoman Janet Yellen indicated the Fed may start raising rates “something on the order of six months” after winding down its bond buying program, even if unemployment remains above 6.5%. There was no indication of change in the Fed’s short term policies. Bonds fell.

Weekly Returns:

S&P 500: 1,866 (+1.4%)
FTSE All-World ex-US: (+0.1%)
US 10 Year Treasury Yield: 2.74% (+0.09%)
Gold: $1,333 (-3.6%)
USD/EUR: $1.379 (-0.9%)

Major Events:   

  • Monday – Russian President Putin signed a decree officially acknowledging Crimea as an independent state, just one day after the region voted to succeed.
  • Monday – The Chinese Central bank doubled the Yuan’s daily trading band, leading it to fall relative to the dollar.
  • Monday – General Motors recalled another 1.7 million vehicles and said it plans to take a $300 million charge to cover problems with ignition switches.
  • Wednesday – Fed Chairwoman Yellen said interest rate increases could begin as early as a year from now, relative to earlier consensus views of late 2015.
  • Thursday – The Philadelphia Fed manufacturing index topped expectations, providing confidence momentum will return after weather related slowdowns during winter.
  • Thursday – AirBnb was rumored to be raising capital in a funding round that would give the home and room sharing business a valuation of $10 billion.
  • Friday – Biotech stocks fell after a letter from the House Energy and Commerce Committee requested a briefing with Gilead regarding the pricing of its Hepatitis C drug.

Our Take:

Capital markets had a knee-jerk reaction to new Fed Chairwoman Janet Yellen’s suggestion Wednesday that the Fed may start to raise interest rates sooner than previously mentioned. Ultimately, whether short rates start to rise next spring, next fall or in 2016 should have little bearing on stock prices. In fact, if rates rise sooner it will most likely be driven by stronger economic growth.

It is easy to forget that the current state of monetary policy is near zero short term interest rates and the purchase of $55 billion of bonds this month. Yes, that is $30 billion less than last year, but it is $55 billion more than normal. The really interesting thing will be if all this quantitative easing ever leads to inflation. Yellen got called in to the game with the bases loaded.  It is only natural for her to want to take a few steps to clarify where blame should lie if Bernanke’s aggressive policies prove problematic in the future.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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