The iShares strategists noted that softening monetary policy boosted equities across all sectors except for financials—underperformance that might be due to anticipation of a prolonged low-rate environment or future rate cuts.
Russell, which reported $241 billion in assets under management as of December 31, 2015, believes the Federal Open Market Committee’s projection of two interest rate increases could result in an increase of the 10-year U.S. Treasury yield to approximately 2.3 percent over the next year.
CLS Investments’ analysts said that the disparity between the Fed’s interest rate projections and market expectations of just one 25-basis-point interest hike shouldn’t impact portfolio allocations, arguing that investors who pulled away from fixed income after the Fed raised rates in December 2015 were left with little shelter during the volatility in equities during January and early February this year.
Wander says that the recent statements could actually be considered more hawkish, given that Yellen was discussing the potential of negative interest rates in the U.S. as recently as February.
“As long as we see economic data continuing on a positive trajectory and reasonable levels of volatility, if April and May are like March, it’s highly likely that the Fed will raise rates in June,” Wander says. “I would support that the right level for fed funds based on inflation and other considerations is probably closer to 1 percent than zero.”
Wander doesn’t believe that interest rate hikes necessarily lead to large fluctuations in fixed income markets, pointing out that the recent “liftoff” in December 2015 was followed by a small rally in Treasurys, bucking some assumptions about the negative impacts of tightening monetary policy.
Russell Investments, on the other hand, is pessimistic on fixed income markets, predicting that government bond yields will remain at or near their record lows throughout most of the developed world.
Not that Russell is particularly high on equities. The firm argues that the business cycle is entering a phase where it “is less supportive for equities.”
“While we do see more prevalent downside risks for the U.S. following the first quarter of 2016, the lack of major imbalances in the U.S. economy makes a recession this year unlikely,” said Paul Eitelman, Russell’s investment strategist for North America, in a report.
Omar Aguilar, Charles Schwab Investment Management’s CIO of equities, said in a different report that volatility in equities should continue for the time being, and that investors may want to shift from growth-oriented stocks to value opportunities.