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Yellen Props Up the Market

| April 04, 2016
MPCA Weekly Market Update

Fed chair Janet Yellen pushed back forcefully against a handful of Federal Open Market Committee members who called for a hike in the federal funds rate as early as April. Yellen said the Fed will proceed with caution given concerns over global financial and economic developments. Markets are currently pricing in less than one additional hike between now and the end of the year.

The S&P 500 returned 1.84% last week. Year to date, the index has returned 1.99%, trades at a P/E multiple of 18.83, and sports a dividend yield of 2.18%. Gains were mostly driven by dovish statements cited above by Janet Yellen and the Fed, which eased fears of a near-term rate hike.  On Wednesday alone, the S&P 500 rose 0.90%, almost half of last week’s gains, in response to Chairman Yellen’s comments.

Investor concerns about the health of the global economy, a big reason for continued issues in the U.S. factory sector, are still with us. These international factors are apparently behind the Fed’s renewed dovishness, as the Chairwoman’s multiple references to global risk factors in last week’s statement shows. Minutes of the last FOMC meeting coming out Wednesday afternoon will likely give us more color on the central bank’s thinking. But the market’s evolving Fed view appears to be that the central bank will make only one more rate hike this year.

On the side of the bulls, the economic picture has lately been showing signs of improvement, with last week’s jobs and factory sector readings confirming that the economy was starting to shake off the restraints from seasonal factors. At the very least, the optimists hope that GDP growth can return to the “muddle-through” pace of about +2% going forward. Market veterans who remember when 4-5% growth was considered the norm are left to wonder about this new normal.

Market bears might counter with the IPO data from last week. In another sign of diminished risk appetites, the market for initial public offerings in the United States has just posted its slowest quarter since the first quarter of 2009, the very depths of the global financial crisis. Activity slowed to a crawl — both in terms of the number of deals and the dollar value of new issues, according to Dealogic.

Additionally, the rating agency Standard and Poor's downgraded their outlook for China's government debt. This is the second outlook downgrade during the month of March. Moody's made a similar move earlier in the month. China's credit outlook is now negative at both Moody's and S&P.