Over the last 5 years, commodities are the only major asset class with negative returns, while US stocks have outperformed all other assets. We've mentioned in previous monthly journals that international stocks may start to play catch-up, and we are seeing that happen as we begin this year. The recent rally in the US dollar has had an impact on all major asset classes with commodities suffering the most. The strong US dollar is a big contributor to lagging US stock performance versus international stocks during the first quarter.
The big event in March was the latest meeting of the Fed's Open Market Committee (FOMC). In a statement after its two-day meeting, they dropped an assurance that they would remain "patient" before acting on rates. Investors assumed this change was coming, so the consensus now expects the Fed to consider raising short-term rates at its June 16-17 meeting.
Because the unemployment rate has fallen to 5.5%, many Fed officials believe the economy is getting closer to a point where it can grow without being hindered by slightly higher interest rates.
However, Fed Chairwoman Janet Yellen stressed after the meeting that the Fed intends to proceed cautiously, based on new central bank forecasts of slower growth and tamer inflation ahead. Importantly, the Fed also revised down its estimate of how low the jobless rate can fall before it starts creating inflationary pressure. In December, officials projected this rate was between 5.2% and 5.5%. Now they say it is 5% to 5.2%. That shift means officials believe they can wait longer before they start to raise rates. This is the real take-away from this meeting, and it means that rates, if raised, will see a smaller succession of increases in coming years.
The conundrum for bond investors is how to navigate the change to a rising rate environment. Traditionally, "full employment" has led to rising wages and prices, but the entire world it seems is in the grip of deflation. More emphatically, European banks and economies are grappling with NEGATIVE official interest rates, which makes U.S. bonds and the Dollar even more attractive.
The fundamentals are much less applicable in this surreal environment. Rising short term rates in the U.S. will power the Dollar higher, hurting U.S. exporters and thus the U.S. economy. In a normal tightening cycle, interest rates are notched successively higher several times in a row. Many feel that one or two hikes is all the US economy can handle before it weakens, given the anemic state of the global economy. Where does the Fed go from there? Back to zero? To sub-zero? Only time will tell.
In other developments this month, a little noticed item involved many U.S. allies (including Germany, France, and the UK) joining a new Asian Infrastructure Investment bank (AIIB), led by China, ahead of a March 31 deadline. China is seeking to supplant the decades old Asian Development Bank, founded after WWII by the U.S. and Japan to rebuild shattered Asian nations. In partnership with other U.S. led supranational organizations like the World Bank (and funded in U.S. Dollars), China has seen its agenda frustrated, and is now ready to call the shots leading its own supranational bank (funded in renmimbi).They've gotten off to a good start, with $50 billion in funding, already a third of the ADB's capital.
After lobbying against membership, the Obama administration is now recommending a partnership. In an exquisite piece of "if you can't beat 'em join 'em" spin, U.S. Treasury Under Secretary for International Affairs Nathan Sheets said, "The U.S. would welcome new multilateral institutions that strengthen the international financial architecture...co-financing projects with existing institutions like the World Bank or the Asian Development Bank will help ensure that high quality, time-tested standards are maintained." For those who see a rising Asia this century, the founding of the AIIB will be considered over time as a seminal event towards Chinese reemergence as a global superpower.
The other noteworthy event for investors this month was the formalization of a Gulf States Alliance to stop the Shiite takeover of Yemen. Led by Saudi Arabia and Egypt, a formal agreement was drawn up among many Sunni states, including the contribution of their militaries, to engage with hostile forces in Yemen (and perhaps Syria in the not too distant future) to stop its takeover by Iran.
Oil prices briefly rose on this news, but did not sky-rocket. Most strategists consider that abundant global oil supplies will overwhelm any temporary transportation disruption (like closing the Straits of Hormuz), but what about long term disruptions? While perhaps seen now as an attempt to tame its unruly neighbor to the south, this Sunni pushback might also be seen as the beginning of a more active Saudi involvement in the Middle East. Not coincidentally, a new Saudi King and government have just recently assumed power, and Iranian nuclear talks are at the trip-wire stage. For investors, the age-old theme of flight to safety may be resurrected.
As we move into spring, many baby boomers are considering their retirement options and more specifically wondering how they should go about claiming their social security benefits. According to Morningstar, roughly half of Americans take social security at age 62 or within two months of retirement. Claiming can be a complex issue, and there is a glut of confusing and outdated advice that can lead to a less than optimal long term outcome. However, knowing exactly what your personalized options are and finding out the path you want to take is available to you. If this is something you are interested in or if you know someone struggling with this decision, we are happy to provide a report that gives a clear picture of the options available.
April is always a beautiful time of year here in the South. With a perhaps only one or two more freezes on the horizon, we're looking forward to the warmer temperatures, and the explosion of color that awaits. Enjoy the great outdoors, and thanks for reading our Journal this month.