In recent years central bankers have played starring roles in the capital markets, and our view is that things were no different during the first quarter. The ECB launched its long awaited quantitative easing program consisting of €60 billion per month in purchases of public and private sector debt across the maturity curve. One of our key concerns has been the risk of global deflation taking hold, and with European consumer price indices at extremely low levels, we are encouraged that policy makers are undertaking these types of aggressive stimulus initiatives. With recent European economic data by and large coming in ahead of expectations, we believe the likelihood of a serious bout of deflation infecting the continent appears meaningfully lower today than it did just a few months ago.
In the U.S., the Federal Reserve is on an altogether different path as it attempts to prepare markets for an eventual normalization of monetary policy. As expected, the Fed dropped the word ‘patient’ from its most recent statement. While the notion that the central bank may be less patient with regards to commencing its interest rate hiking campaign is hawkish in itself, in our view takeaways from the most recent Federal Open Market Committee (FOMC) meeting were decidedly dovish overall. This is in part because officials reduced their median forecast for the Fed Funds Rate at year end by 50 basis points to 0.625%. Moreover, Chairperson Yellen highlighted how data dependent the committee will be with regards to determining when to begin hike rates, and in a later speech accentuated that the pace of policy normalization will be gradual. Stocks reacted favorably to the FOMC meeting, with the S&P 500 gaining 1.2% on the day. The yield on the 2-year Treasury note fell by over 10 basis points, its largest one day decline in over four years, and the dollar fell by 2.5% against the euro, its biggest daily drop since March of 2009.
The U.S. economy had a weak start to the year. We believe it is likely that GDP decelerated sharply as compared with the fourth quarter. Still, we are optimistic that conditions will improve as we progress through the year. It seems reasonable to us to assume that certain transitory factors may have constrained economic output, namely severe winter weather as well as the West Coast port shutdown. With winter behind us, and the port on its way towards normal operating conditions, we think it is unlikely that these issues will persist. The strengthening dollar also negatively impacted GDP as well as corporate earnings. While it is certainly conceivable that the dollar continues on its upward trajectory given the divergence in monetary policies between the U.S. and much of the rest of the world, we would not expect the rapid pace of appreciation which occurred in recent months to sustain itself. Turning to the labor market, hiring in March slowed markedly as only 126,000 jobs were created, well below estimates for 235,000. While this was certainly a disappointing result, unemployment claims are running at healthy levels, and in fact when adjusted for population size are near historical lows. The March jobs report notwithstanding, we believe that improving labor conditions, the benefit of lower energy prices, and a lessening of the aforementioned constraining factors should bode well for economic growth for the remainder of the year.
We maintain our constructive outlook on the market. While the domestic economy got off to a shaky start, we have reasons to believe growth is likely to reaccelerate going forward. Moreover, our view is that the economy should ultimately benefit from the sharp decline in oil prices. While this has already had a detrimental impact in the form of energy sector layoffs and capital expenditure reductions, the potentially greater benefit of increased spending power on the part of the consumer has yet to be seen in a meaningful way. This gives us greater confidence that growth may pick up as the year progresses. We also remain bullish on the housing market. Low mortgage rates are aiding affordability, despite the fact that prices continue to move higher. We are encouraged that household formations have been growing ahead of expectations. And in many markets, rent increases are making home ownership a relatively attractive option.
While our forecast is for higher stock prices at the end of the year, there are reasons to believe that this may be a period of heightened volatility. With regards to monetary policy, though our view is that a steady and gradual normalization of interest rates need not rattle markets, it is possible that investors will remain skittish until the rate hiking campaign finally commences. Greece’s ongoing negotiation with its creditors is another issue which could impact equities. While this has the potential to generate a fair amount headline risk, the world’s most systematically important banks are believed to have drastically reduced their exposure to the country, so a repeat of a few years ago when Greece’s financial issues roiled the world’s capital markets appears unlikely to us. Elsewhere in the geopolitical arena, heightened conflict and instability in Yemen could also have implications for capital markets. We are therefore closely monitoring events in the country. As always, should any of these situations deteriorate and threaten to impact stock prices, we are prepared to implement our risk management procedures in order to preserve client capital to the best of our ability.
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.