PMC Weekly Review - January 9, 2015
It was a roiling start to 2015. Equities markets and oil prices continued to decline steeply, with oil hitting levels not seen in years and both U.S. and global indices down as much as five percent. Yet, as has been the case for almost all sell-offs in the past year, almost as quickly as clouds gathered, they dissipated. On the heels of some dovish comments by some of the Federal Reserve governors along with a stabilization (temporary perhaps) in the price of oil, stocks then rebounded strongly in the middle of the week, only to sag again as attention was grabbed by the unfolding events of Paris and another sad chapter of terrorism and death on Friday.
The result of these moves, however, was that the first two weeks of January have been flat for equities, weak for oil prices, and unexpectedly strong for bond prices and weak for sovereign and U.S. bond yields. Though there was a flurry of commentary about what happens to stocks when the first two days of the year are down, the patterns are so vague as to be meaningless, and you could flip a coin for as much predictive certainty as these first few days give for the rest of the year. That is probably all for the best, as making major bets based on two days of trading is rarely wise, even if those two days are freighted with undo significance because they happen to open a calendar year.
Of somewhat more consequence, as our Envestnet | PMC roundtable this week explored, the drop in interest rates may signal that expectations for higher yields will be disappointed (unless you buy Greek bonds…). U.S. rates are actually high compared to German and Japanese bonds, so investors searching for yield can see U.S. Treasuries at 1.9% as generous. That is indicative of just how low yields are globally, and a sign that inflation is nowhere to be found just now.
In addition, financial markets have focused almost exclusively on the negatives of the oil price decline, ranging from stress on high-yield and emerging market bonds tied to energy and commodities to worsening prospects for emerging markets and international equities. But the positive effects in terms of a boon to consumer spending and a boost to corporate profits may matter more to equities and national economies, and those effects are only beginning.
Finally, the Friday Bureau of Labor Statistics jobs reports showed a continuation of a strong yet still troubling pattern of more jobs and no wage growth. That should not be surprising given the structural challenges of today’s economy and the twin pressures of globalization and technology and automation, but it underscores that many will continue to feel less secure even as the economic data demonstrates improvement.
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