Fed removes the word “patience” from the rate decision: U.S. interest rates remain low as the Fed worries about the economic data that appears to slow versus when to start raising rates.
Europe Starts QE: Interest rates continue to fall in Europe as a result of QE. The result has been a move towards negative yields in the front end of European sovereign debt.
Currency War: The euro closes 2014 at $1.20. The announcement of QE causes a dip below $1.05 by mid-March. Will a lower euro spur economic growth?
“Patience? We don’t need no stinking patience.”
This is what bond traders would have said to Humphrey Bogart if he were on the FOMC with Janet Yellen after the March 18, 2015 rate decision.
Quantitative Easing (QE) ended in the fourth quarter of 2014 and the 10-year U.S. Treasury bond began 2015 at a 2.17% yield. The low yield for the quarter was 1.64% on January 30th and the high of 2.24% was on March 6th. The January rally occurred after the European Central Bank (ECB) announced a QE program. The yield high in March was a result of the market trying to interpret results of the Fed’s first interest rate hike, to possibly occur in 2015.
The long-awaited March Fed meeting resulted in the removal of the word “patience” in their statement on rates. The removal of patience was supposed to signal a ¼ point increase in the Fed Funds rate as soon as the second quarter of 2015. But as the Fed’s minutes of the meeting were digested and Yellen began to speak, it became clearer that the Fed was still dovish. Yields began to decline again.
How could that be? First, economic figures weakened except for the unemployment report. Second, a harsh winter in the Northeast has been blamed for everything from a slowdown in durable goods to the decline in retail sales. Third, the U.S. dollar continues to rise against all major currencies, putting pressure on large cap stocks with sales outside the U.S.
We are of the macro opinion that the Fed will not be able to exit QE and gradually raise interest rates without some unintended consequences. Much of the world’s interest rates are trading at negative yields. This continues to put downward pressure on U.S. interest rates, as they provide relative value versus alternative sovereign debt. That pressure can flatten the yield curve and continue to keep rates lower for longer.
Here is a snapshot of global interest rates before and after ECB President Draghi enacted QE:
|5 year||10 year|
On January 16, 2015 the Swiss central bank removed its peg to the euro and the Swiss currency soared against the euro. The Swiss Bank refused to continue to expand its balance sheet by buying the euro. This can only be seen as a condemnation of ECB policy and a return to defending the Swiss franc. It clearly foreshadowed the long awaited stimulus plan by the ECB the following week.
Finally, on January 21, 2015 Mario Draghi announced a $60 billion euro per month bond buying program until September 2016. The result is that rates across Europe have imploded with France, Germany, Sweden, Netherlands and Switzerland having negative two-year interest rates by quarter end. The German two-year yield turned negative on August 25, 2014 and is still below zero.
The response to these measures was a breathtaking devaluation of the euro. At the end of 2014 the euro was trading at $1.20. Before the ECB QE announcement it was at $1.16 and then traded at the low for the quarter on March 16th below $1.05.
The winners in the first quarter of the euro devaluation have been holders of European equity and the German economy. Maybe the plan is to make an American-made Jeep cost the same amount as a Mercedes and let the consumer decide what to buy. The real proof will be if the peripheral countries around Germany can expand their economies with a lower euro.
So the question going into the second quarter of 2015 is:
Did Draghi pull a rabbit out of the hat? Or did he finally find the rabbit in the hat after years of reaching around for one?
The Taxable Portfolios
Oil prices stabilized and energy sector bonds that were hardest hit in the fourth quarter of 2014 rallied in January after tax loss selling was complete and liquidity returned for the start of 2015. Since we think rates may continue to remain low, we like investment grade credits when the 10-year yield moves higher than 2%.
The Tax Free Portfolios
We continued to add to our holdings in AA or better credits with 4% coupons in 15 to 20 year maturities. We have seen that January tends to come in like a lion with lots of reinvestment money from January 1st interest payments and maturities. Conversely it tends to go out like a lamb in March with new issues greeted with lower demand and buyers being able to have better inputs on price and therefore value.
The Dow Jones Industrial Average is a stock market index that shows how 30 large publicly owned companies based in the U.S. have traded during a standard trading session in the stock market.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performers of developed markets outside the U.S. and Canada.
The MSCI Emerging Markets Index is a freefloat-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
The Barclays U.S. Government and Credit Bond Index measures the performance of U.S. dollar denominated U.S. Treasuries, government-related, and investment grade U.S. corporate securities that have a remaining maturity of greater than 1 year. In addition, the securities have $250 million or more of outstanding face value, and must be fixed rate and non-convertible.
The Barclays U.S. Corporate High-Yield Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
The Barclays 30-Year U.S. Treasury Bellwethers Index is a universe of Treasury bonds, and used as a benchmark against the market for long-term maturity fixed-income securities. The index assumes reinvestment of all distributions and interest payments.
The Barclays 10-Year U.S. Treasury Bellwethers Index is a universe of Treasury bonds, and used as a benchmark against the market for long-term maturity fixed-income securities. The index assumes reinvestment of all distributions and interest payments.
The Barclays 5-Year Municipal Bond Index is the 5 Year (4-6) component of the Municipal Bond index. It is a rules-based, market-value-weighted index engineered for the tax-exempt bond market. The index tracks general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds rated Baa3/BBB- or higher by at least two of the ratings agencies.
Index returns include the reinvestment of income and dividends. The returns for these unmanaged indexes do not include any transaction costs, management fees or other costs. It is not possible to make an investment directly in any index.
Morningstar is the largest independent research organization serving more than 5.2 million individual investors, 210,000 Financial Advisors, and 1,700 institutional clients around the world.
For each separate account with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a separate account’s monthly performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of separate accounts in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The Overall Morningstar Rating for a separate account is derived from a weighted average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics.
© 2012 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. Not every client’s account will have these exact characteristics. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment.
Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security, sector or industry. There is no assurance that any securities, sectors or industries discussed herein will be included in an account’s portfolio. Asset allocation will vary and the samples shown may not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.
The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices and which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk. The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities. The Barclays Capital U.S. Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. The Barclays Capital Aggregate Bond Index is an intermediate term index.
The volatility (beta) of a client’s portfolio may be greater or less than its respective benchmark. It is not possible to invest in these indices.
Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services and fees can be found in its Form ADV which is available upon request.