Supporting our view on stocks over bonds
As widely expected, the U.S. Federal Reserve (Fed) held interest rates unchanged today following its scheduled two-day meeting. Chairman Jerome Powell emphasized the Fed believes current policy is appropriate but noted discomfort with inflation running persistently below their 2 percent target. Market prices indicate investors expect reasonable odds of a rate cut later this year, although our base case is for a steady Fed in 2020 due to our view that economic data is bottoming. Neutral to accommodative central bank policy is a key assumption behind our current capital market views, and today’s announcement reinforces our outlook. Stock prices were mostly unchanged, while bond yields fell slightly, as some investors priced greater odds of a rate cut this year if inflation remains disappointing.
Both the Fed’s formal statement and Chairman Powell’s press conference remarks were consistent with recent messaging. They emphasized holding rates steady is the likeliest path forward for now based on the economic outlook, but that policy is not on a pre-set course. Powell acknowledged there are risks to their outlook, such as the uncertainty surrounding the impact of the coronavirus, but the Fed views the policy rate as already aligned with current economic conditions. Powell stated, “We believe monetary policy is well positioned to support the American people.”
Powell echoed past comments that the Fed remains committed to ensuring ample liquidity is available in short-term cash lending markets. Volatility in short-term lending markets in September prompted the Fed to begin temporary lending operation and to purchase Treasury bills. The Fed confirmed today these operations would continue at least into the second quarter. They also made a minor adjustment to a short-term interest rate (interest on excess reserves, or IOER) to aid in their control over short-term rates.
We remain focused on the trend in domestic and international economic data. We track hundreds of economic data points across the globe via our proprietary “Health Check” monitor, a statistical measure of the average health of current economic data, which indicates global economic data likely bottomed and is starting to recover from the recent slowdown. Odds of a recession have decreased globally and remain subdued for the United States. Central banks remain a tailwind to economic activity with low rates and asset purchases by the Fed, European Central Bank (ECB), and Bank of Japan (BOJ).
We emphasize a pro-growth orientation in portfolios, acknowledging risks but encouraged by growth prospects domestically and abroad. We see an improved risk/reward profile for equities relative to fixed income as the global growth picture stabilizes and demonstrates some improvement, especially with the continuation of easy global central bank policies, including the Fed. Low bond yields weigh on our forward return expectations for fixed income investments. We recommend high-quality bonds comprise the majority of bond portfolios to provide adequate portfolio diversification against riskier holdings.
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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future performance. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general.
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