While stocks retreated on Friday, following a confrontation on
the Ukrainian border, equities pushed ahead last week. Part of
the advance can be attributed to a perception, at least until
Friday, that geopolitical risks in the Ukraine and Middle East
However, as I write in
my new weekly commentary
Where There is Value, There Are Investors
," last week's market performance also proved that investors are
having a hard time kicking a certain habit:
treating bad news as good
As the Federal Reserve (Fed) rolled out its easy money policy
in the years following the 2008 financial crisis, investors
became accustomed to treating weaker-than-expected economic news
as a positive sign that the Fed would soon step in with more
the Fed plans to wind down its quantitative easing program by
and most market watchers expect a Fed rate increase
sometime during the first half of 2015
, many investors still appear to be holding out hope for an even
longer period of monetary accommodation, and such hopes largely
drove last week's advance.
Investors bid up stocks on the back of generally weak economic
data, including another soft U.S. retail sales number, stagnating
growth in the eurozone and slowing loan growth in China. For
example, U.S. stocks rose sharply on Wednesday as investors
interpreted weak U.S. retail sales as reducing the odds of an
early Fed hike.
The common theme in all of these instances was optimism for
either more aggressive monetary and/or fiscal stimulus, or, at
the very least, a continuation of already easy monetary
In my opinion, however, a change in the Fed's intended
monetary policy is unlikely, at least based on recent economic
reports. While the U.S. economy does have persistent pockets of
softness (such as household spending) and does face significant
headwinds (like slow wage growth), it is generally improving.
Though the U.S. economic recovery is certainly uneven, when you
look at recent economic data overall, it's evident that the
recovery is gaining steam and that the U.S. economy has fully
recovered from the first quarter's economic contraction.
I see the U.S. economy growing at around 2% this
, 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
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
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
, 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
and you can find more of his posts
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