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In the following piece, Fifth Third’s Investment Management Group recaps the market and how it reacted to various events in the month of April. I hope you find this Financial Market Roundup helpful and informative.

For the Federal Reserve, the decision to raise interest rates is a lot like being a caring mother who knows the time has finally come to rip off the economic Band-Aid: it’s really more of an art than a science. One must consider not only the timing but also the speed of the act. Pulling it off too early might risk infection, while waiting too long may encourage over-dependence and a false sense of confidence. Then there’s the speed of the act to take into account. Do you pull it off in short, tolerable bursts, delaying the inevitable? Or do you rip it off in one swift motion, hoping the patient concedes that mom knows best?

Global markets aren’t in agreement on what “mom” intends to do; this led to a modest sell-off in risky assets during the month of March.

  1. The MSCI World Index, a broad measure of developed world’s stock markets, declined 1.57 percent for the month.
  2. The S&P 500, a measure of large U.S. companies, declined 1.58 percent for the month.
  3. The MSCI Emerging Market Index, a broad measure of the emerging world’s stock markets, declined 1.41 percent for the month.
  4. The MSCI REIT Index rose 1.75 percent for the month.
  5. Gold declined 2.42 percent for the month.

For more than six years, the Fed has kept short-term interest rates near zero to keep the financial system healthy. Now Fed Chairwoman Janet Yellen has to decide how best to take away easy-money policy without causing a tightening tantrum. The argument for rate normalization is fairly intuitive and straightforward. Simply put, the U.S. economy does not look like an economy in need of monetary assistance. Take a look at the labor market, for example. 2014 was the best year for job growth in 15 years, and we continue to add, on average, close to 200,000 jobs each month during the first quarter. We also need to recognize that a near-zero interest rate policy leaves the Fed with very little room to maneuver once the business cycle eventually ends.

On the other side of the coin, you have the doves that aren’t quite ready to surrender the Fed’s security blanket. They note that the U.S. economy has hit a bit of a rough patch in the first quarter. Data has been somewhat soft due to colder-than-expected weather, not unlike the first three months of 2014. We also haven’t seen a pick-up in inflation expectations, one of the Fed’s key prerequisites for rate hikes. Wages in particular have been relatively stagnant on a year-over-year basis, although recent data suggests employee income pressures are escalating.

The strengthening U.S. dollar and falling energy prices have afforded the Fed with more flexibility to stay lower for longer. The rising currency has a cooling effect on the domestic economy, essentially doing the same job as a Fed rate hike. But we cannot forget, no matter how much we kick and scream, the Band-Aid has to come off one way or another. As the economy continues to improve, exhibiting signs of normalcy, short-term interest rates must normalize as well. It will hurt at first and perhaps the markets will flinch a bit, but ultimately the market’s reaction will likely be minimal and short-lived. What happens after will be of even greater importance. Look for the Fed to wean us off easy monetary policy by implementing a slow rate-hike pace, one that ends with a long-term Fed Funds rate that is lower than historical averages.

 
 
     
 

Market commentary provided by Fifth Third Private Bank. Source of statistics is Bloomberg.com. Returns are calculated from market close on 3/2/15 through 3/31/15. This information is current as of the date of this letter and the opinions expressed are subject to change at any time, based on market and other conditions. This information is intended for educational purposes only and does not constitute the rendering of investment advice or specific recommendations on investment activities and trading. The mention of a specific security within this letter is not intended as a solicitation to buy or sell the specific security. Index performance shown within this letter is not representative of any Fifth Third managed account.

Investing involves risk, including the possible loss of principal invested. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment loss.

Past performance is no guarantee of future results. Indexes are unmanaged, do not incur investment management fees, do not represent the performance of any particular investment, and may not be invested directly into by investors. Small company investing involves specific risks not necessarily encountered in large company investing such as increased volatility. Investments in foreign markets entail special risks such as currency, political, economic and market risks.

S&P 500 Index is a composite of 500 companies, amongst the largest based in the United States, and it often used as a measure of the overall U.S. stock market.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey* and United Arab Emirates.

The MSCI US REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index (IMI) its parent index which captures large, mid and small caps securities. With 137 constituents, it represents about 99% of the US REIT universe and all securities are classified in the REIT sector according to the Global Industry Classification Standard (GICS®).

Gold Index is the U.S. dollar per Troy ounce

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 23 developed market country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.


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