Calm Week for Stock Markets

November
23

Written by: Jon McGraw

Financial markets were remarkably calm last week.

Many stock markets in the United States, Europe and Asia moved higher as investors chose to focus on the minutes of the Federal Open Market Committee (FOMC) meeting of October 27–28, which were released on Wednesday, rather than on recent terrorist attacks in Paris, Lebanon and Mali, and against Russia.

The FOMC minutes captured attention because they suggested even if the Federal Reserve does begin to tighten monetary policy in December, rate increases may be incremental and the target rate may not be as high as many imagined. Bloomberg reported:

“Fed officials received a staff briefing on the equilibrium real interest rate, or the policy rate that would keep the economy running at full employment with stable prices, according to the minutes. Fed officials discussed the possibility that the short-run equilibrium rate ‘would likely remain below levels that were normal during previous business cycle expansions,’ the minutes said.”

Former Federal Reserve Chairman Ben Bernanke has written about the equilibrium real interest rate on his blog. The point he makes is the equilibrium rate—not the Fed—determines interest rates. The Fed uses its influence to move interest rates toward levels that are consistent with its estimate of the equilibrium rate. If the Fed pushes for rates that are too high, the economy may slow. If it pushes for rates that are too low, the economy may overheat. Not everyone agrees on this point, and it has led to debate between Mr. Bernanke and Former Treasury Secretary Lawrence Summers.

While the Fed is expected to begin tightening U.S. monetary policy, the European Central Bank (ECB) is expected to further loosen monetary policy in December. The Wall Street Journal reported the ECB is “prepared to deploy its full range of stimulus measures to fight low inflation.” The news was welcome. CNBC reported European markets closed the week at three-month highs.

Data as of 11/20/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 3.3% 1.5% 1.8% 14.6% 11.8% 5.2%
Dow Jones Global ex-U.S. 2.5 -3.9 -6.4 3.1 0.2 1.5
10-year Treasury Note (Yield Only) 2.3 NA 2.3 1.7 2.8 4.5
Gold (per ounce) 0.0 -9.8 -9.1 -14.5 -4.4 8.3
Bloomberg Commodity Index -1.2 -22.0 -31.0 -17.1 -10.9 -6.8
DJ Equity All REIT Total Return Index 3.8 1.3 5.2 11.8 12.4 7.3

The Buzz on Emerging Markets

If there were a “Page 6” for finance and economics, emerging markets would be splashed across it.

Remember the saying “Buy low and sell high”? Well, emerging markets have not performed well for quite a long time, and that has a lot of people speculating about what may happen in the next few years.

Analysts at BlackRock opined, “Emerging-market (EM) equities are fighting an uphill battle, held back by an appreciating U.S. dollar, falling commodity prices, and flagging exports. These only add to their other medium-term struggles, such as dwindling corporate profits, declining productivity, and a dispirited investor base. With valuations of EM equities trading at the largest discount to their developed-market peers in 12 years, some opportunities are beginning to emerge.”

In fact, several economists and asset managers have begun to compare and contrast the attributes of various emerging markets. Some say China is a better bet than Latin America. Others like the opportunities in Southeast Asia. A Goldman Sachs analyst cited by Bloomberg cautioned, “Colombia, South Africa, Turkey, and Malaysia still need to tackle their current-account imbalances; Russia, India, and Poland are among nations that have improved enough for their assets to rally.”

The point is there is a buzz building around emerging markets. Sometimes, when analysts begin to emphasize the potential of an asset class, investors are tempted to pile in. While emerging market investments can be a valuable part of a portfolio that is well allocated and diversified, it’s a good idea to remember there are distinct risks that are not suitable for all investors.

If you have questions about your financial strategy, please contact your financial advisor.

Weekly Fun—Think About It

“All you need in this life is ignorance and confidence, and then success is sure.”

Mark Twain, American author