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

February saw global equity and bond markets react to “risk-on” market sentiment following January’s capital flows into safe harbors. Domestic and international stocks are back in positive territory for the year and yields on global long-term sovereign debt are moving higher, though some more modestly than others. As investors, we should get more comfortable with volatile markets in 2015, especially as global prices seek new levels of equilibrium given the divergence in monetary policy between the Federal Reserve and other central banks around the world. A tightening Fed, against the backdrop of global easing, will have lasting implications for the U.S. dollar, interest rates and WTI crude prices, and will only increase the instability we see in global asset prices.

As you can see, risky assets did quite well last month, while interest rate-sensitive assets underperformed.

  1. The MSCI World Index, a broad measure of developed world’s stock markets, rose 5.86 percent for the month.
  2. The S&P 500, a measure of large U.S. companies, rose 5.75 percent for the month.
  3. The MSCI Emerging Market Index, a broad measure of the emerging world’s stock markets, rose 3.07 percent for the month.
  4. The MSCI REIT Index declined 3.57 percent for the month.
  5. Gold declined 5.50 percent for the month.

Many predict that the Federal Reserve will start tightening monetary policy sometime this year. That is, they will raise the target range for the Fed Funds Rate, a key benchmark rate that anchors all other rates in the U.S. economy, including loans for mortgages, consumers and businesses. Given that short-term interest rates are far below neutral levels, we believe a single hike in rates should have little adverse economic consequence. However, the Fed has never held rates at a single level for as long as it currently has (six years and counting) in the past 60 years, let alone that this level has been near-zero. Stability like this breeds complacency, and policy shifts after years of inaction can lead to disruptions to equity and bond markets.

When evaluating the potential effect of Fed rate hikes on a balanced portfolio, one should consider both the timing and pace of the tightening program. The timing of the initial rate hike will likely depend on data that speaks to the Fed’s dual mandate, full employment and price stability. It’s a good bet that Fed Chair Janet Yellen is happy with the improved labor market conditions and is fairly confident in the growth outlook for the United States (despite a deceleration in the fourth quarter). Put another way, if employment were the Fed’s sole mandate it’s likely that the policy rate would already be rising. Inflation, on the other hand, isn’t quite where we want it to be yet, still well below the 2 percent target. However, wages appear to have bottomed and other market-based inflation expectations are on the rise, suggesting that the Fed’s “patience” may be waning sooner than many believe. The pace of tightening is the other consideration. The Fed will watch very closely how markets react to the initial rate hike. Its impact will undoubtedly carry a lot of weight in determining the frequency and magnitude of policy tightening in subsequent meetings.

Many market participants fear the economy is not yet strong enough to be weaned off an accommodative monetary regime. Doves argue employment and inflation rates are still below their long-term targets, and the Fed will lose credibility if it has to reverse policy after initiating rate hikes too early. Policy hawks disagree, citing the potential economic destructive power of inflation once it’s allowed to accelerate above target ranges. Those in this camp are quick to remind the Doves that normalizing the Fed Funds Rate will give the Federal Reserve more policy options once the economy eventually begins to contract.

As long as global investors continue to disagree (amongst one another and the Fed) about the timing and pace of rate hikes, volatility measures will remain elevated, and stock and bond prices will fluctuate accordingly. Geopolitical flare-ups have the potential to disrupt markets as well, as incoming news (or rumor) from Ukraine, Greece and the Middle East will likely add to the choppiness of global markets in the weeks and months ahead. However, all this should be understood against a backdrop of continuing growth.


Market commentary provided by Fifth Third Private Bank. Source of statistics is Bloomberg.com. Returns are calculated from market close on 2/2/15 through 2/27/15. 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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