As expected, the European Central Bank (ECB) announced on Thursday morning that it was holding rates steady at record lows and preparing to launch its quantitative easing program on March 9. Despite raising his forecasts for European growth, ECB President Mario Draghi managed to exceed already dovish expectations with details of the quantitative easing plan first announced back in January. Notably, Draghi explained that bonds will be bought at yields at least as much as the ECB’s deposit rate of -0.2%. That means sizable quantities of bonds with negative yields could be purchased.
The U.S. jobs report on Friday was surprisingly strong. Nonfarm payrolls increased by 295,000 in February, blowing past consensus expectations for an increase of 240,000. Aided by rounding, the headline unemployment rate plunged to 5.5%, which is the lowest reading since May 2008.
For the week, the S&P 500 fell -1.58%, the Dow Jones Industrial Average dropped -1.52%, and the MSCI EAFE (developed international) lost -1.84%.
Here are the 3 stories this week that rose above the noise:
Inflation Outlook 2015: The Fed vs. the Market
Is 2015 the year that U.S. inflation finally surfaces? PIMCO authored this article which provides their 2015 inflation outlook along with the two opposing viewpoints: the reflation side supported by the Federal Reserve Open Market Committee (FOMC) and the disinflation camp supported by the global fixed income markets. PIMCO expects core U.S. inflation (as measured by CPI) to increase modestly year-over-year in 2015.
“Transitory forces like lower energy prices and a stronger dollar are keeping inflation below target at the moment, but lower energy prices are ultimately good for the consumer, and we anticipate wage inflation picking up over the cyclical horizon.” As such, PIMCO prefers holding U.S. interest rate duration in inflation-protected form and views a Treasury Inflation-Protected Securities (TIPS) overweight as one of their highest-conviction positions.
The Biggest Threat to Stocks Now: A Fed Rate Hike
The current bull market just reached its sixth anniversary and has gained over 200 percent as measured by the S&P 500. The biggest threat to the bull market over the next year is a Fed interest rate hike, according to this article. The Federal Reserve is likely to hike interest rates between June and October and the rise in interest rates will have several implications.
A rate hike will officially end the era of easy money, which helped fuel the bull market following the Fed’s policy of near zero rates since 2008. Additionally, the stock market historically has been weak around the start of a Fed tightening cycle. It’s possible that a Fed rate hike could cause a market correction, but it’s unlikely that it would trigger a bear market this year because the U.S. economy remains healthy, corporate earnings are still growing and U.S. stocks remain attractive compared to many investment alternatives.
Investors Are Buying Stocks and Bond from Energy Producers Amid Oil Price Drop
Earlier this year, concerns of widespread defaults on below-investment-grade bonds in the energy sector caused the entire high-yield bond market to drop precipitously. Equity markets were also rattled in January as investors wondered if looming energy defaults could become equivalent to another sub-prime housing debt crisis. Fast forward to March 2015 and junk-rated energy bonds are actually up 4.5 percent year-to-date.
A recent Wall Street Journal article highlights the reasons investors are buying oil and gas bonds amid the crude oil price drop. According to Dealogic, oil and gas exploration and production firms have been able to sell about $4.7 billion of bonds in the United States so far this year, up from $2.7 billion at this time last year. The resilience of the energy high-yield bond market is a potentially encouraging sign since it suggests investors are voting that the crude oil sell-off represents a buying opportunity and that energy sector defaults, should they occur, will not be on par with the sub-prime crisis of 2007-09.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.
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.
