Financial markets gave the Federal Reserve a standing ovation last week. At least, that was Barron’s interpretation. What did the Fed do to deserve it?
“…the Fed did what everyone expected, signaling that it could raise interest rates at any meeting starting in June. Yet, Yellen and team still found a way to assure the market that it wouldn’t do anything rash, insisting that the labor market would need to strengthen further, and that inflation would have to be heading for its 2 percent target before they make a move. Even then, the projected path of interest-rate hikes would be slow and steady – and unlikely to undermine the market.”
Stock markets in the United States weren’t the only ones heading toward, or surpassing, new highs. The Fed’s reassurances about the pace at which it would normalize monetary policy pushed markets across the Eurozone higher, too. Reuters reported global investors were feeling confident a weaker euro could goose the region’s economy.
There is some optimism about shorter-term market potential. Experts cited by Barron’s suggested the chance for a stock “melt-up,” which would lift the Standard & Poor’s 500 Index (S&P 500) higher, were pretty good.
However, others believe the longer-term outlook for stocks, as a whole, may temper investors’ enthusiasm. Barron’s explained earnings growth for the S&P 500 is well below its 30-year average, dividend yields are well below their 20-year average, and the index’s valuation is “so high that it is projected to subtract 2.6 percent annualized from returns. Put it together and investors are likely to earn just 0.4 percent after inflation.”
One thing is for sure: It’s awfully difficult to predict the future with any accuracy. Barron’s warned about the quirks of market forecasts, offering an example from a decade ago. “In January 2005, expected returns were just 0.4 percent, yet the S&P 500 gained 5.6 percent annualized during the next 10 years.”