Europe Gets Aggressive with Monetary Policy; Stocks Rise

in Market Commentary by

Market Digest – Week Ending 9/5

Unexpected stimulus measures from the European Central Bank, confusing truce talks in Ukraine, and a soft jobs report blended into mixed messaging for investors. Stocks struggled to find direction, but finished positive for the week, while bonds and most commodities declined. In an effort to stem deflation risk and encourage growth, the ECB cut its major lending rates by 0.1% and announced it will begin purchasing asset-backed securities. The Euro dropped to $1.29 per dollar, 14-month low.

Weekly Returns:

S&P 500: 2,008 (+0.3%)
FTSE All-World ex-US: (+0.5%)
US 10 Year Treasury Yield: 2.46% (0.12%)
Gold: $1,269 (-1.4%)
USD/EUR: $1.295 (-1.5%)

Major Events:   

  • Tuesday – The ISM manufacturing index in August rose to its highest level since 2011 Construction increased 1.8%, to its highest level in over five years.
  • Wednesday – Russian President Putin said he had agreed to the framework of a cease-fire between Kiev’s forces and pro-Russian rebels. Longer-term details were largely unclear.
  • Wednesday – Apple shares dropped 4% amid the announcement of two new Samsung Galaxy phones and security concerns about iCloud accounts after nude photos of Jennifer Lawrence were posted online.
  • Wednesday – Automakers continue to post strong results. Chrysler August deliveries rose 20% to the highest level in 12 years.
  • Thursday – The ECB cut its key lending rate to 0.05%, and announced it will purchase nearly 700 billion Euros of asset backed securities. It will not purchase sovereign debt at this time.
  • Friday – The US economy created 142,000 jobs in August, well short of expected. Unemployment fell to 6.1% as the labor force declined.
  • Friday – Shares of Tesla Motors fell 3% after CEO Elon Musk said the stock price was “kind of high”.

Our take:

The final impact of zero interest rates and massive asset purchases by the Fed won’t be known for a decade or more. So far, they seem to have helped the US economy regain its footing and escape catastrophe in the aftermath of the sub-prime crisis. Typically slower to react, the Euro-zone is now being more aggressive in following a similar path. Investors cheered this week’s rate cut and asset purchase announcement, with European stocks rising and bond yields falling.

It is worth noting Japan has been toying with similar tactics since their bubble-economy collapsed in the early 1990s, and with much less success. But for now, the ECB’s moves seem like a bullish driver for global stocks and could also help support bond prices, potentially proving wrong the consensus view that bond yields must rise.

According to Bank of America, 45% of the world’s government bonds now yield less than 1%. Coupled with low dividend rates, it’s a tough time for investors seeking yield. But cash is not a great substitute. Inflation remains subdued, but it can’t be ruled out as a possible outcome of unprecedented accommodative global monetary policy. It is a risk that should not be ignored. In a weird financial world, a healthy allocation to stocks and real estate may be the best defense for those with a longer-term view.

Image credit: Pixabay

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as the 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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