WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER
March 20, 2015
After holding the federal funds rate near zero since December 2008, the Federal Reserve had been widely expected to open the door to a June 2015 increase. While the language in the Fed’s March 18 policy statement did remove a commitment to remain “patient” in timing its first rate hike since 2006, the overall message actually makes it more likely that the rate increase will occur in September rather than in June.
Moreover, the Fed also signaled a slower pace of subsequent rate increases, affirming that it will set policy at each meeting based on the latest economic data. Tightening will begin when the central bank “has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.” Reflecting this view, Fed officials cut their estimate for the federal funds rate to 0.6% at the end of 2015, down from 1.1% in their December 2014 outlook.
William Riegel, Chief Investment Officer, TIAA Investments
The prospect of a slower pace of rate increases sent U.S. stocks higher and the dollar lower. The S&P 500 Index snapped a three-week losing streak by surging nearly 3% for the week.
European stocks also gained, recording their seventh straight week of positive returns on optimism driven by the European Central Bank’s quantitative easing program and a weaker euro. Cyclical, export-oriented sectors such as autos and industrials outperformed.Japan continued to lead global markets higher, as the softening yen versus the dollar helped the Nikkei 225 Index notch a fresh 15-year high. The advance has been supported by effective government-induced corporate reforms and shareholder-friendly actions (e.g., increased dividend payouts and share buybacks) by several high-profile companies. A market pause, though, is possible after the country’s fiscal year ends on March 31.
Limited supply of qualifying debt in the tighter markets of the Eurozone helped the region’s fixed-income markets, while in the wake of the dollar’s decline immediately following the Fed’s announcement, emerging-markets debt rallied modestly
The past week’s economic releases contained a number of disappointing data reports, some of which could very well reflect the severe winter. Among the releases:
There are a few caution flags, however. Limited progress has been made to ease the conflict in Ukraine and to resolve the debt crisis in Greece. Moreover, reforms are still needed to make European labor markets more flexible and economies more productive.
In terms of U.S. equities, we remain cautiously optimistic. Although continued low oil prices are good for consumers, a later-rather-than-sooner Fed rate hike may indicate that the economy’s recent weakness and the impact of dollar strength are signs of a broader slowdown.We would not be surprised to see a pullback in European equity markets given the speed of their advance and sentiment indicators suggesting the market may be overbought. That said, stocks in Europe remain more attractively valued than their U.S. counterparts, assuming the eurozone economy and corporate profitability continue to improve.
For fixed-income markets, we believe wage inflation, which the Fed would like to see materialize before considering a rate hike, is still many months away. This provides a potential window of investment opportunity in U.S. and European fixed-income assets, as bond markets would stand to benefit from a very gradual rise in wages. One key question is how the number of people working, as represented by the labor participation rate, will affect wage increases and, ultimately, fixed-income returns.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance and Annuity Association® (TIAA®). Teachers Advisors, Inc. is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA). Past performance is no guarantee of future results.
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
Please note that equity and fixed income investing involve risk.
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