Earnings didn’t preoccupy investors last week; Europe did. The International Monetary Fund warned that the euro area could enter another recession; European Central Bank president Mario Draghi urged EU member nations to go in for quantitative easing, but German finance minister Wolfgang Schäuble disagreed. IMF and Federal Reserve officials noted the potential for Europe to slow global and U.S. growth.
Though markets slid last week, let's take a look at how far we've come since last year: As of last Friday, the S&P 500 has gained 12.62% since October 14, 2013. While these pullbacks are often frustrating, keep in mind that as goal-based investors, we are more focused on how long-term performance affects our personal financial goals and less focused on short-term market behavior.
For the week, the S&P 500 fell -3.14%, the Dow Jones Industrial Average lost -2.74%, and the MSCI EAFE (developed international) dropped -2.41%.
Here are the 3 stories this week that rose above the noise:
Fed Wary on Global Growth
Just weeks ago, investors fretted that an improving U.S. economy might cause the Fed to start raising interest rates sooner than consensus expectations for the middle of next year. However, the most recent Fed minutes show that Federal Reserve officials have become more concerned that weak overseas growth and a strengthening U.S. dollar will crimp the domestic economy and hold down inflation — an outlook that has made them more inclined to stick to low interest rates. This article highlights that the Fed decision on when to raise interest rates will be “data dependent” and also have an eye toward developments overseas.
BofA Merrill Lynch Fund Manager Survey Finds Investors Fretting Over Monetary Policy as End of U.S. QE Looms
One catalyst for the recent market correction has been a sharp reversal in investor sentiment toward the outlook for global growth. A recent article summarizes the latest results of the Bank of America Merrill Lynch Fund Manager Survey. In the latest polling, only a net 32 percent of respondents expect the global economy to strengthen over the next 12 months, which was down more than 20 percentage points from the prior month.
The lowered expectations create the potential for a relief rally in risk assets should global economic data stabilize and the mounting pessimism among investors is one contrarian indicator that suggests the market may be close to putting in at least a short-term bottom.
Fed Can’t Keep Falling Short of Inflation Goals, Says Evans
The biggest risk to the U.S. economy is the Federal Reserve raising interest rates prematurely, according to Federal Reserve Bank of Chicago President Charles Evans. It is widely believed that the Federal Reserve will institute a rate hike as early as next summer. However, there is a small contingent of regional Fed leaders that believe the labor market has improved enough for the Federal Reserve to contemplate raising rates in early 2015.
From Evans’ perspective, the Federal Reserve should continue to stimulate the economy while inflation remains low and until the economy shows it has healed enough to withstand a hike in interest rates. Inflation has remained below the Fed’s target of 2 percent for over six years and won’t breach its target until at least 2017, according to Evans. In his view, the Fed should hold off on raising rates until early 2016.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
