AMERIPRISE FINANCIAL, INC.
Markets Brace for Interest Rate Hikes
03/10/2015 | David Joy
After establishing a new record high on Monday, stocks ended last week lower, derailed by a stronger than expected jobs report that rekindled fears of higher interest rates. The S&P 500 shed 1.6 percent, with most of the damage coming after the Labor Department reported that 295,000 new jobs were created in February and the unemployment rate fell to 5.5 percent. Although average hourly earnings grew by just 2.0 percent year-over-year, suggesting no imminent inflationary threat, the worry is that diminishing labor market slack will soon force the Fed's hand to begin lifting interest rates.
Along with falling equity prices, bond yields spiked following the report. The ten-year Treasury note yield jumped 12 basis points to 2.24 percent, its highest level since late December and sharply higher than its low of the year of 1.64 percent on January 30. The two-year note yield jumped to 0.73 from 0.64 percent. Not surprisingly, it was the yield-sensitive utilities equity sector that suffered the worst losses, plunging 3.1 percent after the jobs report. Defensive consumer staples and healthcare stocks lost close to 2.0 percent. Ultimately, no sector was spared on the day.
The dollar surged as well, climbing to 1.08 from 1.10 versus the euro, just one day after the European Central Bank (ECB) outlined the details of its imminent quantitative easing program.
The Fed's next meeting is on March 18, and the focus once again will be on the language it uses to characterize its outlook. In particular, investors will be watching to see if the Fed drops the word "patient", widely understood to mean no rate increase for the next two meetings. If it is dropped, then a rate increase comes into play at the Fed's June meeting. Whether it happens then or not will still depend upon the intervening economic data, but investors will have been put on notice.
It is important to keep in mind that higher interest rates are not intrinsically bad for stocks. A return to normalized monetary policy would be a welcome development, as it would represent a milestone in the recovery from the financial crisis.
Whether the first interest rate hike comes in June or July or September is really of little importance. Whenever it occurs, if rates are rising because the economy is improving, economically-sensitive equity groups should benefit. In particular, the consumer discretionary sector should benefit from the robust job creation and lower energy costs, and should be relatively insulated from the rising dollar. Financials should benefit from increased lending activity, widening net interest margins, and active capital markets activity. Technology spending should buck the trend of moderating capital spending coming from the energy sector as businesses focus on cloud computing, data storage, mobile access and rising cyber security concerns.
The broader averages may have to go through some adjustment as investors come to terms with a pending shift in a longstanding monetary regime. But the Fed is likely to be quite deliberate in the trajectory of interest rate policy, not wanting to jeopardize what many still view as a fragile recovery.
A key variable for investors will be the future path of the dollar. While less than 15 percent of U.S. economic activity comes from exports, more than a third of S&P 500 revenue is derived from overseas sales. If the Fed is edging closer to raising rates, while the ECB and Bank of Japan are aggressively easing, the dollar is likely to continue to firm, making U.S. goods less competitive. If that happens, overseas export-oriented stocks in the Eurozone and Japan may well outperform, but might require hedged positions to provide realized benefits for U.S. investors.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
03/10/2015 | David Joy
After establishing a new record high on Monday, stocks ended last week lower, derailed by a stronger than expected jobs report that rekindled fears of higher interest rates. The S&P 500 shed 1.6 percent, with most of the damage coming after the Labor Department reported that 295,000 new jobs were created in February and the unemployment rate fell to 5.5 percent. Although average hourly earnings grew by just 2.0 percent year-over-year, suggesting no imminent inflationary threat, the worry is that diminishing labor market slack will soon force the Fed's hand to begin lifting interest rates.
Along with falling equity prices, bond yields spiked following the report. The ten-year Treasury note yield jumped 12 basis points to 2.24 percent, its highest level since late December and sharply higher than its low of the year of 1.64 percent on January 30. The two-year note yield jumped to 0.73 from 0.64 percent. Not surprisingly, it was the yield-sensitive utilities equity sector that suffered the worst losses, plunging 3.1 percent after the jobs report. Defensive consumer staples and healthcare stocks lost close to 2.0 percent. Ultimately, no sector was spared on the day.
The dollar surged as well, climbing to 1.08 from 1.10 versus the euro, just one day after the European Central Bank (ECB) outlined the details of its imminent quantitative easing program.
The Fed's next meeting is on March 18, and the focus once again will be on the language it uses to characterize its outlook. In particular, investors will be watching to see if the Fed drops the word "patient", widely understood to mean no rate increase for the next two meetings. If it is dropped, then a rate increase comes into play at the Fed's June meeting. Whether it happens then or not will still depend upon the intervening economic data, but investors will have been put on notice.
It is important to keep in mind that higher interest rates are not intrinsically bad for stocks. A return to normalized monetary policy would be a welcome development, as it would represent a milestone in the recovery from the financial crisis.
Whether the first interest rate hike comes in June or July or September is really of little importance. Whenever it occurs, if rates are rising because the economy is improving, economically-sensitive equity groups should benefit. In particular, the consumer discretionary sector should benefit from the robust job creation and lower energy costs, and should be relatively insulated from the rising dollar. Financials should benefit from increased lending activity, widening net interest margins, and active capital markets activity. Technology spending should buck the trend of moderating capital spending coming from the energy sector as businesses focus on cloud computing, data storage, mobile access and rising cyber security concerns.
The broader averages may have to go through some adjustment as investors come to terms with a pending shift in a longstanding monetary regime. But the Fed is likely to be quite deliberate in the trajectory of interest rate policy, not wanting to jeopardize what many still view as a fragile recovery.
A key variable for investors will be the future path of the dollar. While less than 15 percent of U.S. economic activity comes from exports, more than a third of S&P 500 revenue is derived from overseas sales. If the Fed is edging closer to raising rates, while the ECB and Bank of Japan are aggressively easing, the dollar is likely to continue to firm, making U.S. goods less competitive. If that happens, overseas export-oriented stocks in the Eurozone and Japan may well outperform, but might require hedged positions to provide realized benefits for U.S. investors.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
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