Aaron Schaefer

Apr 08 2015

April’s Economy and Market from Here… at Hills

The Economy and Market from Here...at Hills.

A general easing of global monetary policy continued amid persistent declining inflation and sluggish economic progress. Eurozone finance ministers reached a temporary resolution on a Greek aid program, with the granting of a four-month extension in late February following the approval of terms from Greece. The latest U.S. Federal Open Market Committee meeting ended with the committee removing the word “patient” from its statement about interest rates.  This change would indicate that a slight rate increase of the Fed Funds rate could be forthcoming later this year.  The action was highly anticipated and markets did not react significantly to the announcement.

Consumer sentiment remained high, but below recent record levels, as expectations weakened. New home sales remained strong in January, while existing home sales disappointed. Home prices increased in December at the fastest pace in nine months. Economic growth slowed to a 2.2% annual rate during the fourth quarter, which was slower than initial estimates and significantly less than the third quarter 5.0% rate. Oil prices remained low for most of the quarter, but domestic gas prices rose nearly 40 cents per gallon. The increase was due to refinery shutdowns caused by employment strikes and seasonal disruptions as producers convert to summer blends.

Stock markets rose in the first quarter. The S&P 500 was up slightly returning 0.95%, and the MSCI EAFE Index, representing developed international stocks, rose a solid 5.04%. Bonds provided a modest total return as interest rates ended the quarter about where they began despite lots of intermittent fluctuations.

Amidst slow but mostly positive economic growth, lower oil prices, near-zero interest rates and the ardent pursuit of unconventional monetary policies by the world’s most important central banks, it is tempting to assume the bull market is in jeopardy. But despite recent volatility, our tendency is to remain optimistic regarding equity markets.

While oil prices have started to rise, they remain notably lower than in the recent past, which is a net positive for oil-consuming countries and regions, both developed (the U.S., Europe, Japan, Korea) and emerging (China, India, Asia-Pacific). Lower energy prices may encourage central banks to keep ultra-easy monetary policies in place for longer and encourage additional governmental measures aimed at stimulating economies in places where inflation is already well below target.

Of course, every year has its surprises—potential negative influences include more aggressive tightening by the U.S. Federal Reserve, further slowing of economic growth in China, political dysfunction (especially in the U.S. and U.K.) and, of course, further turmoil involving Russia.

The strengthening dollar will have a negative impact on the earnings of U.S. exporters; lower import costs (especially for energy) should provide an offset. In short, a strong dollar should not spell the end of the multi-year bull market in U.S. equities. Valuations may be elevated in the U.S. compared to other countries, but we believe relatively strong-and-steady profit growth justifies the higher price-to-earnings ratio applied to U.S. stocks.

Due to their relative cheapness, international equity markets that have badly lagged the U.S. in recent years could start to play catch-up, assuming global economic growth gains some traction. In general, we think developed international markets should provide more consistently positive performance in 2015, given the tailwind of lower energy prices, more accommodative monetary policies and some easing of fiscal constraints. The Eurozone in particular is a likely beneficiary of economic growth.

It is always good to get together to discuss strategy and to confirm that your asset mix is in line with your expectations. Please feel free to contact your account administrator to review your account and determine if the current allocation is still appropriate for your circumstance.

Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.
Aaron Schaefer

About Aaron Schaefer

Aaron Schaefer is Vice President, Trust Investment Officer at Hills Bank’s North Liberty location on Forevergreen Road. He has been at Hills Bank since 2004 and manages the investment area of the Trust and Wealth Management division. Aaron can be reached at aaron_schaefer@hillsbank.com.

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