Last week’s volatile trading serves a clear reminder to just how much sway U.S. monetary policy still holds over the world’s financial markets. As expected, the Fed announced an additional $10 billion reduction in its monthly quantitative easing (QE) asset-purchase program. Citing labor market improvement, the Fed also altered its forward guidance policy by replacing its 6.5% unemployment threshold for triggering the end of its zero-interest-rate policy with a more qualitative and holistic assessment of the labor market. By projecting rates to rise to 1% at the end of 2015 (from 0.75%) and 2.25% by the end of 2016 (from 1.75%), some interpreted the new forecast as a sign that the Federal Open Market Committee will begin tightening sooner and/or more aggressively than previously expected. Despite the Fed drama stealing most of the spotlight, there was also some noteworthy economic data that seemed to indicate that the soft patch in U.S. economic activity was primarily weather-related and is now starting to abate.
For the week, the S&P 500 was up +1.38%, the Dow gained +1.48%, and the MSCI EAFE (developed international) rose +0.13%.
Here are the 3 stories this week that rose above the noise:
Gas Boom Rejuvenates Manufacturing
An article from The Wall Street Journal highlights the resurrection of U.S. manufacturing that is occurring due to the shale gas drilling boom. In a dramatic about-face, petrochemical companies have returned to the U.S. and are making multibillion-dollar investments to profit from the abundant cheap natural gas pouring out of shale-rock formations across the country.
From 2010 to 2012, energy-intensive manufacturing sectors added more than 196,000 U.S. jobs and increased real sales by $124 billion in the nation's metro areas, according to the report. Steel plants across Indiana's Rust Belt and from Birmingham, Ala., to Knoxville, Tenn., to West Mifflin, Penn., have more orders for metal. And machinery-sector growth exploded between 2010 and 2012, with Houston leading the way, followed by Chicago, Detroit, Los Angeles and Milwaukee, the report said. "That means jobs," said Lansing, Mich., Mayor Virg Bernero. "There are still people who need jobs, and advanced manufacturing is the ticket."
Fear of Rising Rates Killing Bull Overblown?
A recent article from the USA Today has a nice summary of the historical evidence on how stocks perform during periods of rising interest rates, a concern which again came to the forefront of investors’ minds following last week’s U.S. Federal Reserve meeting. As detailed in the article, stocks have performed fairly well on average when interest rates are rising but still low. As this condition is typically associated with an improving economy, cyclical sectors have tended to perform best on average.
As noted in the article, once interest rates hit a high nominal level stocks have tended to struggle. We have also found that when the pace of the rise in interest rates is very sharp it has also tended to provide a headwind for stocks. Nonetheless, the article provides a good historical perspective that suggests stocks can perform well during a period of moderately increasing interest rates.
Pace of Home Price Gains Slow According to the S&P/Case-Shiller Home Price Indices
Today’s release of the S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that the 10-city and 20-city composites rose 13.5% and 13.2%, respectively year-over-year through January. The broader 20-city composite posted its third consecutive monthly decline of 0.1%, with 12 cities seeing their annual rates worsen.
As of January 2014, average home prices across the United States are now back to their mid-2004 levels. Separately, purchases of new homes in the U.S. fell in February to the lowest level in five months. Unusually frigid temperatures along with rising mortgage rates, higher property values and a lack of supply have dampened prospective buyer demand.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
