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Eagle Asset Management - Interest Rates and Equity Markets

Posted by WrapManager's Investment Policy Committee
October 27, 2015

Eagle Asset ManagementEagle Asset Management's Richard Skeppstrom reviews the Fed's interest rate decision and discusses current equity markets in this month's market perspective.

"Interest-rate constipation

U.S. economic growth was nearly 4 percent in the second quarter and the U.S. Federal Reserve decided to leave rates at 0. It was rumored to be a close call but labor conditions aren’t perfect: too many aren’t looking for work, international markets are unsettled and infl ation remains just below target. I didn’t believe 0.25 percent made any difference anyway but equities weren’t thrilled. You might think that after watching these things for 20-some years, I’d know if the news were good or bad; however, I’m not even sure what the news was in this case. Some countries aren’t well-run? Some people would rather not work? In any case, the Fed still believes it imprudent to pay interest on savings. Congrats to the borrowers.

For years we’ve been told that rate increases would begin in 2015; we’re running out of months. Appropriately, Fed Chair Janet Yellen had an answer: perhaps October. I have to admit to being dumbfounded by what exactly she thinks could change from September to October. European and emerging-market problems will not be resolved next month. U.S. growth is adequate and the economy is on solid footing. As an aside, Yellen’s follow-up speech ended awkwardly as she stumbled through several lengthy pauses later attributed to dehydration. My cynical view: She didn’t quite believe what she was reading. Frankly, I’m beginning to have my doubts too. The longer this drags on, the more permanent it seems. But whatever she actually believes, managing our escape from the black hole of 0 percent interest-rate policy must be intensely stressful. Proper hydration is in order.

And just when I’d almost completely bent my mind to the probability of low rates forever, I came across a very interesting article arguing just the opposite. The article, by A. Evans-Pritchard of the Telegraph, illuminated the work of Charles Goodhart, emeritus professor at the London School of Economics and a former senior official at the Bank of England. Goodhart’s conclusion is that the global economy is at a critical inflection point with respect to abundant, cheap labor and that has profound implications for a whole host of nettlesome issues, including interest rates, markets, wages and inequality.

It’s a relatively simple thesis. The entrance of China and other emerging markets into the global economy in the latter part of the last century more than doubled the global labor pool. That happened to coincide with the maturing of technologies that permitted companies to move operations anywhere, which they gladly did. That phenomenon, combined with China’s staggering growth, formed a “sweet spot” for labor arbitrage that depressed..." Download below to read full report.

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