By: Dave Chenet, CFA, CAIA®
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.94%|
Source: YCharts, Yahoo! Finance, WSJ
Markets had a tough holiday-shortened week. Stock and bond prices fell as bond yields rose, reflecting investors’ adjusted views on a Federal Reserve which may need to maintain a restrictive policy stance in light of stickier inflation and diminished signs of a severe economic downturn. Rates markets reacted to the release of the Fed minutes from the early February meeting which indicated a continued resolve by policy makers to maintain higher short-term borrowing costs in an attempt to cool economic growth and quell inflation. Additionally, a higher-than-expected print of the PCE price indicator, the Fed’s preferred gauge of inflation, pushed short-term rates back to levels approaching 15-year highs.
While we remain aware of the monthly volatility in inflation data, we also note that the larger trend is one of less severe levels of price change. CPI data is up 3.5% at an annual rate over the last three months (down from the 9.1% rate witnessed in June of last year) and monetary policy is now at a level at which deteriorating economic conditions could be met with appropriate policy action. The path to normalization will likely continue to be a rocky one, but we continue to believe in the prudence of a disciplined, long-term approach.
What We’re Reading:
Chart of the Week:
A decade-plus of US stock market outperformance (>200% outperformance of US vs Emerging Mkts stocks, measured in US Dollar) has lead to a dislocation between market capitalization and the share of global GDP. As a percent of market cap, Emerging Mkts represent 13% of global stock market value but 50% of global GDP. As a result, the valuation difference between developed and emerging market stocks are trading at 20-year lows. These trends represent significant opportunity for investors with a long-term time horizon.
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