Is the S&P 500 in for a prolonged plateau?

Historically, we have seen a few indicators from the Federal Reserve (Fed) for forecasting stock market returns. One of these was positive stock returns in the day or two surrounding the release of Federal Open Market Committee meeting minutes. A less-watched indicator is particularly interesting – one from the St. Louis Fed, which it publishes on its ‘Fred’ website.1

The St. Louis Fed’s adjusted monetary base chart is a favourite of inflation hawks, aghast that the monetary base has quadrupled since 2008, increasing $3.1 trillion from the Fed’s massive quantitative easing.2 If you plot the recent history of S&P 500 returns against the monetary expansion over the past few years, it makes an artful case for QE-induced asset price inflation. Since the Fed ended its QE party, the monetary base has been relatively flat; will the S&P500 returns flatten with it? 3

Jason Lejonvarn – Mellon Capital, a BNY Mellon company

1: https://research.stlouisfed.org/fred2/

2: The adjusted monetary base is meant to reflect changes in demand due changes in reserve requirements of the relevant depository institutions.

3: While the adjusted monetary base has varied over the last two years it is now at the same level it was in early March 2014, $3.9 trillion.

Historically, we have seen a few indicators from the Federal Reserve (Fed) for forecasting stock market returns. One of these was positive stock returns in the day or two surrounding the release of Federal Open Market Committee meeting minutes. A less-watched indicator is particularly interesting – one from the St. Louis Fed, which it publishes on its ‘Fred’ website.1 The St. … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
The rise and rise of Blockchain investment

Motivated by the disruptive potential of Blockchain, firms that specialise in financial technology have witnessed – and should continue to see — an influx of investment from venture capitalists and investment banks for the digital ledger’s commercial advancement. As the technology continues to make inroads in the strategic planning of financial institutions and world governments, we believe it could quite easily blossom into a multibillion-dollar market – and that’s only accounting for financial services. Even more applications for Blockchain are possible in such wide-ranging industries as health care, title management and property management, all of which are formidable markets ripe for digital evolution.

Erik Swords and Scott Canning – The Boston Company Asset Management, a BNY Mellon company

Motivated by the disruptive potential of Blockchain, firms that specialise in financial technology have witnessed – and should continue to see — an influx of investment from venture capitalists and investment banks for the digital ledger’s commercial advancement. As the technology continues to make inroads in the strategic planning of financial institutions and world governments, we believe it could quite … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Policymakers’ March missives may burn bondholders

With market expectations for future US interest rate hikes increasingly diverging from the median forecasts of Federal Reserve (Fed) members, something is going to have to give.  Recent concerns over global growth and inflation outlooks and the negative spillover effects to financial markets have caused expectations to be lowered to just about one 25bp hike over the remainder of 2016.  Bond markets are likely to be disappointed by policy makers who we expect to maintain a more optimistic view of the economy and thus continue to communicate their expectations for several rate hikes later this year.

The Fed is unlikely to raise rates following its March meeting, choosing a cautious approach to rate hikes in response to the disappointing growth in Q4 2015 as well as heightened growth risks globally. While it is likely the Fed lowers their forecasts for rate hikes over the course of the year, we believe they will do so modestly. Recent indicators for growth show a rebound in Q1 2016 and, importantly, measures of core inflation as well as the unemployment rate are already at or near the Fed’s year-end forecasts. As the Fed reaffirms their forecasts for multiple rate hikes in 2016, we see scope for rates to rise across the curve which will disappoint bondholders expecting continued low rates.

Robert Bayston –  Standish, a BNY Mellon company

With market expectations for future US interest rate hikes increasingly diverging from the median forecasts of Federal Reserve (Fed) members, something is going to have to give.  Recent concerns over global growth and inflation outlooks and the negative spillover effects to financial markets have caused expectations to be lowered to just about one 25bp hike over the remainder of 2016.  … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Who are the winners and losers of the new service economy?

We have seen secular changes in pricing power taking place. For example, the price of coffee beans has fallen sharply over the past five years but consumers have not felt the effects as service companies (the coffee shops) have actually built stronger positions. How cheap would a cup of coffee have to be to persuade consumers to change their daily routine and visit a different coffee shop from the one they regularly pass? Probably quite a lot, which serves to highlight how pricing power has shifted from the producers (the coffee plantations for example) to the service providers (the coffee shops).

Likewise, many companies are being disintermediated by technology so the price of ‘stuff’ is falling. In the meantime, however, new services are being made available for which consumers are seemingly prepared to pay more – think streaming of music content (through music streaming services) versus owning the actual music. We believe previous sources of competitive advantages will be challenged in new ways and that stock selection will have to be acutely reflective of this.

Raj Shant – Newton, a BNY Mellon company

We have seen secular changes in pricing power taking place. For example, the price of coffee beans has fallen sharply over the past five years but consumers have not felt the effects as service companies (the coffee shops) have actually built stronger positions. How cheap would a cup of coffee have to be to persuade consumers to change their daily … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
There and back again: the dollar’s fall and rise

The DXY (US dollar, trade-weighted) Index started life in 1973 in the wake of the disintegration of the post-World War II Bretton Woods system of managed exchange rates. Its value at launch was 100. Since then through wars, stock market crashes, the fall of the Berlin Wall and the invention of the World Wide Web, the DXY has waxed to 165.7 in February 1985 and waned to 70.7 in March 2008. Today it is almost back where it started at 100.

A 43-year round trip sounds exhausting, but for investors who timed their exit and entry points well, the US dollar has also been rewarding. As the world’s premier reserve currency it is highly liquid and readily tradable in spot, forward and option markets. Currently the dollar is close to a 12-year high and our base case is that diverging economic fortunes coupled with policy divergence and repatriation flows will continue to support the dollar in 2016.

 Paul Lambert – Insight, a BNY Mellon company

The DXY (US dollar, trade-weighted) Index started life in 1973 in the wake of the disintegration of the post-World War II Bretton Woods system of managed exchange rates. Its value at launch was 100. Since then through wars, stock market crashes, the fall of the Berlin Wall and the invention of the World Wide Web, the DXY has waxed to … read more

  • Download
  • Print
0 comments | Join the conversation, comment now