The environment for investors is changing directly resulting from the moves made by the European Central Bank last week. Despite ECB Chief, Mario Draghi’s efforts, banks are losing their influence on the markets.
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In June 2014, the ECB cut their interest rates, making them negative for the first time ever after the Euro fell and the Euro STOXX bank dropped 26%. Likewise, the Bank of Japan has experienced major problems in their banking system over the past 18 months, even though they have been successful at crushing yields.
The US might be the biggest house on the block. In the presence of strong employment and inflation data combined with higher stock and commodity prices (especially oil prices rallying in the past couple of weeks), the US may indeed see its second rate hike in the near future. Where only a month ago, everyone was talking recession, the Federal Reserve will likely have no issue with continuing its strategy of raising rates with the S&P 500 hitting the 2,000 mark and oil moving closer to $40 a barrel. At the same time, raising rates may put a ‘short term’ ceiling on stock prices. While the US dollar is at its highest level since July 2014, limits seem to have clearly been reached. If the Feds raise rates again, it is likely that the US will see a much different financial landscape; one with less consumer spending.
With all of the talk of recession and bear markets since the beginning of the year, it is easy to lose sight of just how far we’ve come since 2008. We don’t believe that it’s possible to accurately time the beginning or end of any market cycle. Since we can’t predict where markets will go later this year, we can take a look at underlying fundamentals and make prudent adjustments to investment strategies as needed. We’re keeping a close eye on markets and will continue to keep you informed.
The week ahead is packed with data. In addition, there are two central bank meetings in what the media is calling “bank-a-palooza,” a series of meetings by the ECB, Federal Reserve, and Bank of Japan to decide monetary policy. While the Fed isn’t expected to raise interest rates again next week, officials could provide valuable insight into the timing of future rate hikes. If economic data supports further increases, and markets ‘hold up’, investors could confront the possibility of multiple rate hikes this year.1
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