Investment Commentary – February 25, 2015

Dow – 18,209.19 (2/24/15 close)
S&P 500 – 2,115.48 (2/24/15 close)
Nasdaq – 4,968.12 (2/24/15 close)
10-year Treasury – 1.99% (2/24/15 close)

  • Fed Chair Janet Yellen provided Congress yesterday with an upbeat view of the labor market and said policymakers will raise interest rates when they are “reasonably confident” inflation will pick up toward the Fed’s annual 2% goal. Her remarks set the stage for a possible mid-year rate increase while giving the Fed the flexibility to wait longer if the labor market falters and meager inflation shows no sign of ticking up.
  • Yellen offered no clear signal when the Fed will raise rates from near zero for the first time since the financial crisis. But she indicated policymakers could act before unusually low inflation picks up.
  • European stocks have performed well so far in 2015 after a disappointing 2014. Analysts say that investors are taking comfort from a steadier economy and the tailwind of bond buying by the European Central Bank (ECB). But the rally suggests investors had been discounting an eventual agreement between Greece and its creditors. This view appeared to be validated on Friday when EU finance ministers agreed to extend aid to Greece for 4 months. Whether this will be sufficient time to address the longer-term differences between Greece and its creditors remains an open question.
  • Greece will remain a chronic issue for investors for some time to come.
  • Oil prices have dropped nearly 50% over the past 6 months, to start the new year at 2009 crisis levels close to $50 p/barrel. Analysts believe this is a transitional period as markets adjust to significant pressures on both the supply and the demand sides. While prices may decline further in the very near term, oil market fundamentals now seem supportive of higher prices. That said, they don’t expect a return to prior levels anytime soon, and think this is a structural shift to a more volatile environment.
  • Lower oil prices are a tailwind for global growth. The largest economies like the U.S. and Europe are net importers, and their savings should more than offset the negative effect on oil exporters like Russia. Declining prices have also pressured headline inflation lower, but the impact is likely temporary.
  • The U.S. economy is accelerating into 2015 across broad range of indicators, and unemployment is subsiding to pre-crisis levels. Analysts expect the sharp drop in oil prices to provide additional support to growth over the next few quarters as the savings to consumers translate to more spending. Against this backdrop, they believe the Fed is on track to raise interest rates for the first time since 2006, at either the June or September 2015 meeting.
  • Examples of the recent momentum in growth include: GDP growth for the 3rd quarter 2014 was revised up from 3.9% to 5%, the fastest rate in more than a decade, due mainly to stronger consumption. Non-farm payrolls rose by 321,000 in November, bringing the 6 month average gain to more than 250k for the first time since 2006. Retail sales (excluding autos) increased 4.3% year-over-year in November, the biggest increase since 2012. Auto sales twice hit an annualized rate of more than 17 million in the second half of 2014, a level not seen since 2006. Confidence is at its highest level since 2007 among both consumers and small businesses, according to the University of Michigan and National Federation of Independent Business surveys.
  • Analysts continue to like Technology and Healthcare sectors
  • In fixed income analysts favor high yield. They still see relative value in high yield despite it outperforming both Treasuries and Treasury Inflation Protected Securities this year.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Disclosures:
https://assetmanagement.gs.com/content/gsam/us/en/individual/market-insights/gsam-insights/fisg-quarterly-outlook/2015/
http://www.usatoday.com/story/money/2015/02/24/fed-chief-testifies/23908809/
https://www.blackrock.com/investing/insights/weekly-commentary