The last 12 months have produced a wide difference in returns when looking at the broad asset classes
. Most world equity markets have averaged low single-digit returns over the last year. The lion's share of volatility has been seen in hard assets (in pink on the chart below) like gold, silver, natural gas, crude oil, copper, and lumber. All of these are negative over the last 12 months, with crude oil leading the way, down 50% over the period. The old saying, "the trend is your friend
" has held true the past year, as U.S. stocks have continued to lead other asset classes higher:
On the news front this past month, finance ministers and central bankers from the G20 met in Istanbul February 8-10 to consider the no growth / slow growth conundrum of the world's major economies. Among a laundry list of items in their post-meeting communique was a declaration that strongly supported aggressive easy-money policies as a tool for promoting growth. Lowering official interest rates has long been understood to be an effective tool to depreciate a currency so, in effect, the G20 just endorsed currency depreciation as a means of stimulating their economies.
The envisioned path forward, therefore, is one in which exports are made more affordable for foreign buyers via currency devaluation. Some have called this a "race to the bottom", "beggar thy neighbor", and "currency wars", but any way you slice it, deflation (lower prices) will be the outcome. Countries will move aggressively to protect their home markets, like the U.S., which this month saw a bill introduced to place increased tariffs and duties on certain categories of imported goods. Large exporters, like China, will act quickly to protect their competitive currency rate, as they did the last day of February by announcing a surprise cut in interest rates. All in all, it suggests still lower interest rates are coming, not higher.
On the geo-political front, President Obama asked the U.S. Congress for a new resolution to conduct military operations against ISIS, including the use of ground forces, on February 11. Congress has yet to approve a resolution, but it may mark the start of a re-escalation of this age-old conflict that is essentially an Islamic Civil War. Throw in a new Saudi Arabian King, a crash in global crude oil prices, and a militant Shiite Iran that is encircling the Sunni countries, and you've got a toxic mix that is heading to a boil. Markets have already factored in lower oil prices, but seem complacent about this volatile area of the world. That's usually when surprises happen and volatility explodes higher.
The new Greek government didn't take long to show their true colors, as they accepted a four-month extension of the current "bail-out" under terms set by the IMF, European Commission, and ECB ("Troika"). National parliaments voted for approval, most notably Germany, even though the vast majority of people in both countries oppose further concessions. The language of the bail-out was vague, but it contained some classic "spin": "In the commission's view, this list is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review, as called for by the euro-group at its last meeting." It does nothing but kick the can down the road. In the meantime, we will see how the Greek people react to being sold out once again by the politicians. It's shaping up to be one "hot" summer in Athens.
Lastly, in a little noticed move, JP Morgan announced at month end that it would begin charging large depositors to hold their money. This is an expansion of a policy begun in Europe called NIRP (negative interest rates). The bank cited new regulations and low interest rates as the reasons, and is targeting a $100 billion reduction in deposits. The effect may be small to start with, but others are sure to follow. The result will be to further dampen economic activity via the "multiplier effect", as less money gets lent out. There is certainly no incentive to earn a negative interest rate, so the turnover ("velocity") of money, already at decade long lows, will remain floor-bound:
Source: St. Louis FRED
All in all, February revealed several important markers for the road ahead. Currencies will remain at the center of competitive jockeying in the global trade arena. This makes it less likely that the U.S. Fed will raise interest rates, since it would drive the U.S. Dollar higher and make our exports uncompetitive. Interest rates will continue to drift down, especially in countries that have above average yields (emerging markets). The U.S. will continue to be seen as a safe haven as military conflicts fester globally, leading to more capital coming into U.S. markets. That should be supportive of stock prices.
We'll continue to monitor global price trends, which evolve and change over time just like the seasons. It's been a snow-filled month here in NC, so hopefully, spring is just around the corner and we can all put the snow shovels away! Have a great month of March, and remember to celebrate the Irish in us all!