Why Hasn’t Goldilocks Run Back Into the Forest Yet?

Why Hasn’t Goldilocks Run Back Into the Forest Yet?

With another year in the history books and equity markets off to a strong start in 2017, we can’t help but reflect on the Federal Reserve’s role in this elongated period of appreciation in the stock market.  Recently, the improvement in the economic outlook has resulted in the Fed initiating a tightening cycle which has included three interest rate hikes since late 2015.  During previous economic cycles, rising rates have not necessarily been well received by the stock market; however, this time it has resulted in a so-called “Goldilocks” environment.

In December of 2015, the Fed released a baby bear market in the form of the first interest rate hike in the U.S. in over nine years.  The quarter point increase in the Federal Funds rate took the target from essentially zero to a range of .25 percent to .5 percent.  Shortly thereafter, a combination of weak energy prices, softening international economies and uncertainties over currency fluctuations in China caused the stock market to have the worst start to a new year in history.

A second rate hike came in December of 2016 and markets reacted quite differently.  Economic data was experiencing an upswing and investor sentiment had improved in response to the formation of a business-friendly, pro-growth U.S. government.  Additionally, the rosy projections for low double digit earnings growth could prove to be more realistic than in years past given fourth quarter earnings results were solid.1  As another catalyst, potential tax relief and a shift towards lower business regulation could also positively impact 2017.

As was the case the year prior, the Federal Reserve communicated that we could see a few interest rate hikes in the new calendar year.2  The third interest rate hike arrived this past March, a little sooner than predicted by the market, but still didn’t cause Goldilocks to awake from her peaceful slumber.

So, if interest rate hikes are designed to slow growth, why hasn’t the stock market been under more pressure?  In modern investing times, we haven’t had a backdrop of global interest rates being at, or below, zero.  The move away from zero bodes well for economic growth in the U.S., as well as emerging markets, to the extent that it reflects a strengthening global economy.  Although rates have been moving upward, we are far away from the much higher rates of past cycles.  The average 10-year Treasury bond yield since the late 1800’s is 4.6% versus yields at present, which are currently below 2.5%.3

Market volatility has also been quite low partly due to the Fed being more transparent than in prior cycles via telegraphing their intentions well ahead of their actions to smooth the rate transitions.  The Fed has continually highlighted that, at this stage, they are only gradually raising rates in an attempt to position them “just right” – low enough to be accommodative but not too high to dampen economic growth.  Should the Fed move towards reducing its balance sheet, we expect this will also be done in a passive and predictable manner.

Although volatility might pick up, if inflation remains low and global economic growth persists, current market multiples can be sustained and valuation concerns may be put to rest if earnings growth continues to impress.  In this scenario, Goldilocks has digested her porridge, and we anticipate that it could be some time before the bears arrive home and chase her back into the forest.

1https://insight.factset.com/hubfs/Resources/Research%20Desk/Earnings%20Insight/EarningsInsight_030217.pdf

2https://www.bloomberg.com/news/articles/2017-03-03/yellen-hints-fed-may-need-more-2017-rate-hikes-than-penciled-in

3http://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

Articles and Commentary

Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


Video Presentations

All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.

Recent Posts

Sep 16, 2021
CNBC Halftime Report: Watching for Catalysts in the Stock Market | September 16, 2021
Sand Hill News
Sand Hill News
CNBC Halftime Report: Watching for Catalysts in the Stock Market | September 16, 2021

On September 16, 2021, Sand Hill CIO Brenda Vingiello, CFA joined the CNBC Halftime Report panel once again and discussed what positive catalysts investors can

read more
Sep 8, 2021
CNBC Squawk Box: What To Expect From Markets in the Coming Months | September 8, 2021
Sand Hill News
Sand Hill News
CNBC Squawk Box: What To Expect From Markets in the Coming Months | September 8, 2021

On September 8th, 2021, Sand Hill CIO Brenda Vingiello, CFA joined the CNBC Squawk Box program once again. Brenda addressed what the month of October

read more
Aug 31, 2021
CNBC Squawk Box: What Could Cause a 5% Market Pullback | August 31, 2021
Sand Hill News
Sand Hill News
CNBC Squawk Box: What Could Cause a 5% Market Pullback | August 31, 2021

On August 31, 2021, Sand Hill CIO Brenda Vingiello, CFA joined the CNBC Squawk Box program once again. In the below clip, Brenda discusses what

read more

Stay up to date, receive email updates from Sand Hill directly to your inbox!