This week’s big event is the Federal Reserve (Fed) meeting on Wednesday. Market participants have been split on whether the Fed will drop the “patient” language, and if it does, what that will mean for the market. I have been asked several times during the past few weeks if the Fed will raise interest rates, and if so, when? Despite the economic data being relatively strong recently, I believe the Fed should tread cautiously in raising interest rates.
Employment has been trending positively for some time now, and the unemployment rate has fallen solidly below the Fed’s target of 6.0%. Other growth indicators have been mixed such as the Gross Domestic Product (GDP) and last week’s University of Michigan’s Consumer Sentiment Index, which fell from 95.4 to 91.2. I am definitely seeing more strength in some of the lagging indicators of the economy, while leading indicators are starting to trend lower.
However, growth is only one half of the Fed’s dual mandate, and inflation continues to be below the Fed’s target of 2%. I think inflation will remain below the 2% level for the foreseeable future. These domestic factors are exacerbated by a consistently strengthening dollar and weakness in key global economies. In this environment, I believe the Fed should remain very cautious and deliberate in any tightening, or it may potentially suffer the fate of the European Central Bank (ECB), which has had to reverse course on prior tightening and now is engaged in significant quantitative easing and negative interest rates.
The Fed wants some policy flexibility and is inclined to raise interest rates later in 2015, but this may not be the correct policy action. I continue to expect increased market volatility in the near term. In the short term, I am modestly bearish on stocks and credit spreads and bullish on interest rates, especially the long end of the yield curve.
This blog post is for informational use only. The views expressed are those of the author, Dave O’Malley, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client. Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.