Weekly Market Recap In the US this week we saw healthy employment data, combined with some evidence of a softer manufacturing sector. The European Central Bank lowered interest rates and extended its asset purchase program out to March 2017. These efforts are intended to boost European growth.
The US Federal Reserve Board meets the week after next, and is expected by many to raise interest rates. This is in part due to the positive economic data we have seen of late. What does this mean for your portfolio?
The first thing to note is that trying to predict the Fed is not easy. Forecasters have anticipated the Fed raising rates for the past several years only for many to be proven wrong. For example, many thought rates would rise this September and that did not happen. We saw similar forecasts in 2014 and even 2013. So even though a rate increase may seem probable this December, in our view, these events are seldom certain. We believe trying to adjust a portfolio based on predicting short-term events can lead to higher trading and tax costs, and not necessarily better investment outcomes.
It is also important to remember that we regard international diversification as an important part of portfolio construction. While European and Chinese central banks have been easing their monetary policies, the US appears poised to tighten. It's clear that the global economies are at diverse points in their economic business cycles. Even though you'll likely see more headlines about what is happening to US interest rates, remember that an international portfolio is exposed to a broad set of global events. This may help smooth investment outcomes and volatility of an investor's portfolio over time.
Our view is that the reason the Federal Reserve is considering higher interest rates is because the US is experiencing relatively low unemployment and potentially increasing inflation for the intermediate term. Both of these are generally considered signs of a healthy, growing economy, and economic growth can be an important contributor to stock market growth.
Finally, according to research published in the book Invest With The Fed, returns of equities and bonds have historically remained positive during periods of tighter monetary policy.
So, if the Fed does raise rates this month, remember that it is in response to the positive scenario of a strong US economy, and that periods of rising interest rates in the US have historically correlated with positive market returns.
Notes:
US Jobless Claims: http://www.dol.gov/ui/data.pdf
US Manufacturing: https://www.instituteforsupplymanagement.org/ismreport/mfgrob.cfm
ECB Announcement: https://www.ecb.europa.eu/press/pressconf/2015/html/is151203.en.html
Predictions of Fed rate hike: http://www.bloomberg.com/graphics/2015-fed-rate-hike-predictions/
Invest with the Fed: Maximizing Portfolio Performance by Following Federal Reserve Policy, R. Johnson et al, McGraw-Hill, 2015
Disclaimer:
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