Given Fed Chairwoman Janet Yellen’s comments yesterday regarding equity markets, we want to provide you with a brief update relative to the markets.
- Bonds have witnessed a sharp increase in volatility in the past two weeks. The biggest relative change has been seen in international markets. A chart of German 10-year rates over past year is shown below. (Source: Factset)
- The rate volatility looks in part to be tied to critical milestones in the ongoing saga of the Greece restructuring. Greece has an upcoming payment of approximately €1 billion due to the International Monetary Fund on May 12 and resistance in Germany leaves potential for a new reform package up in the air.
- However, in most markets the sharp move in rates has only returned interest rate levels to ranges seen late last year or early this year. While talk of Fed rate increases has picked up again, we think the global rate environment, moderate economic activity and strength of the U.S. dollar continue to make the prospect for substantial shifts in rate structure quite challenging.
- If rates move appreciably higher from the current ranges without changes in monetary policy, it would suggest to us the central bank stimulus programs may be losing some of their efficacy.
- Most of our purchases of fixed income instruments we have made this year have been focused on short duration (less sensitive to changes in rates) and high credit quality securities as an alternative to zero yielding cash.
- Volatility has spilled over into the equity markets and the reaction to comments by Fed Chairwoman Janet Yellen demonstrate the challenge the Fed has ahead of it when they decide to raise rates.
- Despite the increased volatility in rates, U.S. equity markets are only a few percentage points off their highs. The reality is that while equity volatility gets the headlines the real volatility of late has been in fixed income.
- Economic and earnings expectations have steadily decreased since the early part of 2015. While corporate earnings have met expectations in most cases they are meeting lowered expectations when compared to earlier in the year.
- Without appreciable economic growth by mid-2015 (like we had in 2014) the potential for gains in equity markets in the second half of 2015 may be diminished and we may not see the strong finish to the year that we are hoping for. We are keeping an eye on this dynamic and will make adjustments if necessary in our actively managed strategies. However, for now we remain hopeful that strength can build throughout the second quarter.
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This commentary is intended for the dissemination of general information regarding market conditions to Lowe Wealth Advisors clients. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this report will come to pass. While any general market information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Any opinions expressed are current only as of the time made and are subject to change without notice.