Weekly Market Highlights

European Quantitative Easing Program Exceeds Expectations, Lifts Global Markets

  • The ECB announced a QE asset purchase program that will amount to €60 billion per month and last until at least September 2016
  • The Federal Open Market Committee will convene on Tuesday and Wednesday
  • 4Q earnings move into high gear with 144 S&P 500 companies, representing 36% of the index market capitalization, scheduled to report their financial results this week

Last Week’s Highlights

  • NAHB Housing Market Index: 
    -1 to 57 in January.
  • U.S. Housing Starts: 
    +4.4% to SAAR of 1.089 million units in December.
  • U.S. Building Permits: 
    -1.9% to SAAR of 1.032 million units in December.
  • European Central Bank Policy Decision:  The ECB announced an expanded asset purchase program that will amount to €60 billion per month and is intended to continue until at least September 2016.
  • U.S. Existing Home Sales: 
    +2.4% to SAAR of 5.04 million units in December.
  • Oil:  $45.59 ($3.37)
  • Gold:  $1,292.60 ($15.70)
  • U.S. 10-year Treasury:  1.81% (0.02%)
  • Dollar:  Euro--$1.12, Yen--117.79
    (strengthened against Euro, weakened against Yen)
  • VIX:  16.66 (4.29)

What to Watch for

  • Tuesday 1/27: 
    - U.S. Durable Goods Orders
    - Case-Shiller Home Prices
    - U.S. New Home Sales
    - U.S. Consumer Confidence
  • Tuesday 1/27-1/28: 
    - FOMC Meeting
  • Friday 1/30: 
    - U.S. 4Q 2014 GDP (first estimate)

The European Central Bank and President Mario Draghi exceeded expectations on Thursday with their announcement of a quantitative easing program that will begin in March and last until at least September 2016.  The size (€60 billion per month compared to initial estimates of €50 billion per month), scope (securities other than ABS and covered bonds will have maturities between 2 and 30 years) and length (at least 19 months) of the quantitative easing program were all better than anticipated.  Importantly, the QE program is open-ended as the Governing Council will continue purchases beyond September 2016 until they see “a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.”  From a risk sharing standpoint, the ECB will only assume 20% of the default risk associated with the additional asset purchases with the remaining 80% being assumed by the national central banks of the issuing countries.

Investors Give Draghi Thumbs Up

The market’s response to the ECB’s quantitative easing announcement has generally been positive—global equity markets and inflation expectations have improved while bond yields and the euro have declined.  Longer-term, the outlook for the Eurozone still hinges on growth and inflation moving sustainably higher from current levels as well as continued progress on structural reforms that have been lacking to date.  We will monitor Europe’s prospects on each of these fronts, but believe positive investor sentiment and the potential for improving economic fundamentals could be supportive of European risk assets for the time being.

Life After ECB QE

With ECB QE now in the books, investors will shift their attention to the timing of the first rate hike and the outlook for U.S. yields.  This week, the Federal Open Market Committee will be convening, but we anticipate a relatively uneventful meeting.  Although we expect another steady year for the U.S. economy and labor markets, the Fed is likely to be patient in their approach to monetary policy normalization given the current dynamics of inflation (low and falling), global growth (slowing and diverging) and the U.S. dollar (strengthening).  In our opinion, U.S. equities remain attractive in such an environment and we believe they are also well positioned to navigate periods of heightened market volatility.

Statistics on the Current State of the Market

Market IndexWTDMTDYTD
Equity      
S&P 500 Index 1.6% -0.3% -0.3%
Russell 1000 Index 1.7% -0.2% -0.2%
Russell 1000 Growth Index 2.1% 0.6% 0.6%
Russell 1000 Value Index 1.2% -0.9% -0.9%
Russell Midcap Index 1.8% 0.2% 0.2%
Russell 2000 Index 1.1% -1.3% -1.3%
DJ Industrial Average Index 0.9% -0.7% -0.7%
NASDAQ-100 Index 3.3% 1.0% 1.0%
MSCI EAFE Index 2.6% 0.7% 0.7%
MSCI Emerging Markets Index 3.5% 3.7% 3.7%
Alerian MLP Index 3.0% -1.6% -1.6%
Cash & Fixed Income      
Citigroup 10-Year Treasury Index 0.0% 3.3% 3.3%
Barclays US Aggregate Index 0.1% 1.5% 1.5%
Barclays Municipal Bond Index -0.1% 1.4% 1.4%
BofA Merrill Lynch U.S. High Yield Index 0.4% 0.3% 0.3%
Real & Alternative Assets      
FTSE EPRA/NAREIT North America Index 0.6% 8.3% 8.3%
FTSE EPRA/NAREIT Global Index 1.2% 6.2% 6.2%
Bloomberg Commodity Index -2.1% -3.1% -3.1%
Gold (NYM $/ozt) Continuous Future 1.2% 9.2% 9,2%
Crude Oil (NYM $/bbl) Continuous Future -6.9% -14.4% -14.4%

Data Source: FactSet and RIMES

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