Looking forward, I see the U.S. economy growing at around 2% this year, consistent with the post-crisis average since the United States came out of the recession in the third quarter of 2009, but with a decidedly stronger second half. For the Fed to step in with a longer-than-expected continuation, or even an increase, in monetary stimulus, we’d need to see a clear trend of weaker-than-expected data rather than the mixed, but still generally positive, economic reports dominating headlines today.
Plus, rates have been grinding lower lately without any help from the Fed, thanks partly to softness in other countries. Persistent economic weakness and the lingering threat of deflation have pushed down European bond yields. German Bund yields traded below 1% last week, an all-time low. To the extent that lower European yields make the United States more attractive by comparison, Europe’s slowdown is contributing to the persistence of low rates in the United States. In turn, low rates are helping to support stocks, as investors have little choice but to search for return, and even income, in other asset classes.
So, rather than continue to hope for an unlikely sea change in Fed policy, investors would do better to focus on relative valuation, which has become a key differentiator of performance lately. Despite lingering economic headwinds, market segments with relatively cheap valuations have been attracting buyers, a trend I expect to continue.
Sources: Bloomberg, BlackRock Research
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.