A Watershed Moment
Fed Chair Janet Yellen announced the extension of near zero interest rates on September 18th. The equivocating announcement of “no rate increase now but surely by the end of the year” was received poorly by the markets. To us, it marks the end of an era when the central bank had investors’ backs without question. The perceived near-end of extraordinary accommodation by the Fed marks a big change in the environment for investors. Such a change was inevitable. Zero rates cannot go on forever and in some ways it is an expression of confidence in the underlying economy, however, it comes at a tender time for markets.
The global economy is growing at a worryingly anemic pace as China’s growth slows to accommodate its shift from an export led society to one that is more balanced between consumption and manufacturing. Such a shift knocks the pins out from underneath the markets for basic materials, commodities and the developing nations that depended on feeding China’s rise. A stronger dollar (a natural result of the end of Fed accommodation) complicates matters for many emerging market countries as dollar-denominated debt becomes more of a burden to repay.
In fact, financial conditions have already become tighter. A look at the relationship or “spread” between government bond rates and the rates of riskier private debt confirms this. Our concern is that the law of unintended consequences will act to undermine markets in unpredictable ways, so we recommend a continued cautious investment stance.
The earnings picture for the S&P features slowing earnings growth. The recent drop in stock prices reflects much of this more subdued outlook. Stocks could trade lower as the combination of tighter policy and slowing profit growth begin to bite. The gold we find amid the rubble caused by the shifting courses of policy and profit lies in the opportunity to pick up valuable securities at prices marked down by uncertainty. We do not believe that the cyclical bull market in stocks beginning in 2009 is ending, but that uncertainty will rule the day until the effects of policy changes at the Fed and direction of global growth are more clear.
The Altavista Investment Team - Fall 2015