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The Economy Is In A State Of Reflation (The Financialist)
Global GDP remains sluggish and benchmark interest rates remain close to zero around the world.
Credit Suisse Asset Management Systematic Allocation Strategies founding partner Jonathan Wilmot “has a name for this kind of lopsided recovery: Reflation, which he defines as a period during which nominal and real GDP growth accelerates, but short- and long-term interest rates remain lower than is typical during an economic expansion.”
“While many are calling for a spike in rates any day now, Wilmot says that the economic state of reflation tends not to be short-lived. Even if rates jump in the short term, they will quite likely remain below their historical averages for longer than many investors expect… If the bond market remains relatively subdued in response to improving economic data, corporate profit growth could continue to be strong and equities could continue their outperformance relative to fixed income for several years or more.”
The consensus coming out of the Federal Reserve’s recently released minutes along with the Jackson Hole Symposium suggests that interest rates are likely to be on the rise. Russ Koesterich CFA, chief investment strategist for BlackRock believes “the Fed is likely to begin raising rates in the first half of 2015, and the first rate hike could come as early as March.”
According to Koesterich, you should avoid treasury bonds with two to five-year maturities as well as commodities like gold. “While longer-term interest rates have remained stable, the prospect for an early Fed tightening is exerting downward pressure on the prices of shorter-maturity Treasury bonds — particularly those with two- to five-year maturities — and pushing yields higher.” In addition, “the prospect for tighter monetary conditions is driving the dollar higher and putting downward pressure on many commodities.” As a result, these two asset classes are likely to become more volatile than stocks.
Koesterich believes that, “although not cheap, stocks have the tailwinds of still-low rates and improving economic conditions at their back.” Thus, they may prove to be a more resilient investment.
Bonds Will Likely Disappoint In the Second Half Of This Year (Columbia Management)
So far in 2014, bonds have been performing very well due to underwhelming growth and fall rates. In fact, according to Columbia Management’s Global Asset Allocation Team,”longer duration U.S. bonds [are] performing even better than equities.” This is in spite of “negative sentiment on bonds [that] had been building in concert with expectations of improved growth and higher rates.”
However, the team, still “expects bonds to deliver negative or relatively low returns unless growth disappoints in the second half.” This is because, although “U.S. rates may appear low in absolute terms, [when] compared with the rest of the developed world, they are actually higher in a relative sense than at any previous point in this cycle.”
The Market Expects The US Economy To Expand For Another 5 Years (Deutsche Bank)
Since we are now in the sixth year of economic recovery and in the midst of a bull market, as we over due for another recession? No so says Deutsche Bank Security’s chief economist Torsten Slok. “Recessions don’t happen because of a clock ticking. Recessions happen because of imbalances in the economy or too tight monetary policy… In other words, with the fed funds rate well below neutral for many more years this expansion will likely also continue for many more years.”
“One way to quantify how long time this expansion will continue is to look at the length of expansions and the level of the fed funds rate when expansions ended, i.e. just before recession began,” said Slok. “On this measure the market still expects this expansion to continue for another five years or so.”
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