Stocks Rally Following Janet Yellen’s Conference and Scotland’s Historic Referendum by Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
Interest rates can’t stay zero forever, but for now it’s more of the same.
The Federal Reserve’s bond-buying program, enacted to spur growth, will indeed be winding down next month, as expected. But record-low interest rates will stay as they are for a “considerable time,” Fed Reserve Chairwoman Janet Yellen insisted during her Wednesday press conference.
It was “game on” for the stock market following Yellen’s speech. The Dow Jones Industrial Average closed at a new record high of 17,156, while the S&P 500 Index rose two points to close at 2,001, and the Nasdaq nine points to end at 4,562.
This news gives stocks reason to rally for a “considerable time,” or at least until the Fed gives us a more concrete timeframe for a rate hike.
With interest rates very likely to rise sometime next year and at an indeterminate pace, you should consider being diversified with short-term bonds, as they’re less volatile to rate changes. Our Near-Term Tax Free Fund (NEARX), which invests in such bonds, recently received the coveted five-star rating from Morningstar for the three-year performance period.
This week in an interview with Marc Lichtenfield’s Oxford Club Radio, U.S. Global Investors Director of Research John Derrick highlighted some of the fundamentals of NEARX:
“Our average maturity’s around 2.75 years, so under three years right now… The overall fund structure is pretty conservative. [NEARX] really doesn’t move around that much. It’s a steady grinder.”
Rolling with the Punches
Chairwoman Yellen stated that the decision to raise rates was “highly conditional” and dependent on the Federal Open Market Committee’s (FOMC) assessment of the economy, which appears right now to be showing moderate or, in some sectors such as housing, faltering growth. Inflation has also fallen short of expectations.
But as always, we see opportunity.
The producer price index (PPI) numbers, released Monday by the U.S. Bureau of Labor Statistics (BLS), reveal that demand for goods such as gasoline and food dropped 0.3 percent while demand for services rose 0.3 percent, resulting in an unchanged final demand of 0.0 percent.
Meanwhile, the consumer price index (CPI), which measures the cost of living, unexpectedly decreased 0.2 percent in August, the first time it’s done so since April of last year. The all-items index, however, has risen at a rate of 1.7 percent over the last 12 months.
U.S. housing starts had a disappointing downturn last month, the Commerce Department reported, tumbling 14.4 percent to a seasonally-adjusted annual rate of 956,000 units. This decline is even lower than the projected -4.9 percent. Building permits fell 5.6 percent, below the -1.6 percent economists estimated.
Despite a decline in starts and permits from July, homebuilders’ confidence in the market soared to 59.0, according to the National Association of Home Builders/Wells Fargo builder sentiment index. This is the highest such reading since November 2005, before the housing bubble collapsed.
We might see stronger growth in the housing market very soon, as U.S. fixed mortgage rates had their biggest weekly jump of the year, following the increase in 10-year Treasury yields on the heels of Yellen’s press conference. This might help light a fire under hesitant homebuyers and encourage them to act. According to the Mortgage Bankers Association’s (MBA) weekly survey, mortgage applications rose 7.9 percent from a week earlier.
Through the 12 months ended August 2014, the annual U.S. inflation rate is 1.7 percent, below many economists’ and Fed policymakers’ hopeful estimate of 2 percent.
Although lower-than-expected inflation might lead to less pain at the pump and checkout aisle, it can also sometimes lead to a sluggish economy. Debt financing becomes challenging. And as counterintuitive as it might seem, when prices are down, people tend to sit on their money and wait for even better prices to come along.
Rising prices, on the other hand, often prompt spending. For this reason, a little inflation is welcomed by some companies and their employees. Profits and wages can both increase, which stimulates borrowing and spending. The jump in mortgage rates is a perfect example.
As the U.S. Ends Quantitative Easing (QE), China and Europe Begin
With low inflation also comes the risk of dipping into deflation territory, which China is now facing. The country’s own PPI declined 1.2 percent in August, continuing a 30-month downtrend, while its CPI rose only 0.2 percent from July. Its purchasing managers index (PMI) also dropped last month, as did imports and manufacturing jobs.
To counteract this slowdown, China’s central bank injected $81 billion to five state-owned banks. So far the market seems to have liked the stimulus measure, as stocks in both the Hang Seng Index and Shanghai Composite Index have rallied, tracking positive stock performance on Wall Street. Only time will tell if the world’s second-largest economy is in a permanent recovery mode, but we’re optimistic.
Like the People’s Bank of China, many central banks around the world continue or are implementing easing policies. The European Central Bank (ECB), for instance, will be buying close to $1.3 trillion in bonds to provide fresh capital to the Union’s depressed banking system. All of this global stimulation activity is good for global financial markets and specifically U.S. equities. We’ll be exploring this very topic in our October 2 webcast, “One World Market, Many Central Banks: How Will Your Investments Be Impacted?”
Scots Vote “Nay” in Historical Referendum
Speaking of one world market, it collectively breathed a sigh of relief Thursday when Scotland voted to stay in its long-term relationship with the United Kingdom. As a Canadian, I’m familiar with separatist movements. In Scotland, as it is with Quebec, there seems to be a disconnect between wanting to break up the government in order to obtain more government. At a time when there’s so much uncertainty in the world, when members of the eurozone are in the doldrums, when China is trying to jumpstart its economy, when Russia is rattling its saber and ISIS is spreading as quickly as the Ebola virus, the last thing we needed was a major restructuring of one of the globe’s most stable and reliable countries.
Once the votes were counted, stocks in London rose and the pound bounced up a quarter of a percent.
Below you can see the current gross domestic product (GDP) growth forecasts for the U.S., eurozone, U.K. and China. Had Scotland voted “yes” in the referendum, it’s possible that the increased uncertainty might have stalled growth among these powers and altered economists’ predictions.
Granted, every people has the right to declare its independence for