While U.S. stocks managed to eke out modest gains last week, it wasn’t without some violent swings along the way. The gyrations can partly be attributed to mixed economic data, but there’s also another major factor driving both stock and bond markets today.
As I write in my new weekly commentary, “Central Banks Still Hold the Keys,” we’re still in a world where market swings, both positive and negative, are being disproportionately driven by central banks.
In the United States, investors were encouraged by soothing comments from the Federal Reserve (Fed) on Wednesday. The central bankers’ statement raised the assessment of both the broader economy and the labor market, and confirmed expectations for a rate hike later this year. However, investors were relieved that the Fed’s forecasts suggest a shallower path of rate hikes next year and in 2017.
With fears over the Fed calmed, bonds rallied. Both long and short-term rates retreated, sending the yield on the 10-year Treasury roughly 20 basis points (0.2 percent) below its June 10, 2015 peak. The moderation in rates allowed for a rebound in stocks, a trend supported by increasing flows into equity funds.
Price action in other markets reflected a similar phenomenon. Indeed, just as the Fed’s words brought solace in the U.S., still accommodative central banks in Europe and around the world are helping to keep markets steady, even as Greece has become a greater headline risk.
By providing liquidity to the broader eurozone (in the form of its monthly bond-buying program), the European Central Bank (ECB) is helping to limit the scale and duration of any contagion related to events in Greece. Chinese stocks, meanwhile, are likely to continue their ascent only as long as the authorities are willing to provide significant monetary stimulus.
The key takeaway for investors is that even as the Fed starts to normalize U.S. rates later this year, markets should still be benefiting from historically low rates and aggressive monetary stimulus from most of the world’s central banks. For better or worse, we’re still in a world in which market returns are heavily influenced by what central banks are doing, saying and even thinking.
