As we end the first week of March, the North American markets have been markedly choppy, but then again increasing volatility has been a frequent theme recently.
Last week we discussed the U.S. Federal Reserve and some of the economic data they examine and incorporate into their interest rate decisions, noting that the Fed has never raised rates when S&P earnings were falling and headline inflation was below 2%. What a difference a week makes.
This morning we saw employment data that showed gains in excess of 200,000 new jobs for the 12th straight month, which is the strongest stretch of economic job growth in over 20 years. This prompted Richmond (Virginia) Federal Reserve president Jeffrey Lacker to say in an interview today that the labour market has performed better than expected and that the Federal Reserve can raise interest rates even if inflation measures remain below the central bank’s target. Igniting a major reaction by the markets where there is considerable discussion that the U.S. Federal Reserve may now raise its key overnight lending rate in June, as opposed to later in the year as was previously expected. While at the same time we also saw the number of initial jobless claims rise to their highest levels since last May.
To make things even more complex today, it is the discussion surrounding the pace of those interest rate hikes that is causing even more stress on the markets. If the Federal Reserve does in fact raise rates in June, then when is the second rate hike? Will it be September or November? Needless to say, the result today is a manifestation of heightened volatility within the capital markets. While I, nor anyone, can answer those questions with any certainty, the one thing I do know for sure is that during this period of uncertainty a higher level of market stress and volatility can be expected - during which time you could very well see us recommend increasing our holdings of cash for a short period.
Heightened speculation of rising interest rates in the United States, while the rest of the world is either on hold or reducing their rates continues to drive strength in the U.S. Dollar, and we are seeing it climb nearly a full cent today versus our own Dollar. With a strengthening US Dollar one obvious area of expected weakness is the price of Gold Bullion, and we are seeing a considerable decline today. While we are not big owners of gold on behalf of our clients, the continued strength of the US greenback does have us considering reducing that asset allocation even further.
Regarding economic statistics this week, we continued to see strengthening industrial output and employment figures out of the European economic region, especially from Germany where industrial production grew for the fifth consecutive month in February. So with the Eurozone seemingly pulling itself together, global growth visibility improving and earnings growth expected to accelerate later this year, we believe maintaining greater “risk managed” international assets should benefit them.
As we noted last week, we continue to remain balanced towards risk and reward favoring strong North American equity and fixed income ownership, however, we have been recently increasing ownership of Europe and Asia via the First Asset Low Risk Europe ETF and iShares MSCI EAFE ETF.
Just a kind reminder - Daylight Saving time in North America begins on Sunday March 8, 2015. Don't forget to change your clocks - move them forward one hour!
Please note that for your friends in the UK and most of Europe Daylight Savings Time begins on Sunday March 29th, and for any of you that have friends or family in China of Hong Kong, they do not have Daylight Savings Time
Given that we lose an hour of sleep this weekend, remember taht extra cup of coffee on Monday morning.
We thank you for the privilege you have bestowed upon us with taking care of you and your family. We thank you for that trust.
As always, we welcome your feedback. Have a great weekend.
The Dekker Hewett Group