09/16/15   The End of ZIRP?

Editor’s Corner

Ron Rowland

I usually know the results of the FOMC meeting when writing this newsletter. However, this time around, the Fed chose to end its two-day meeting on Thursday instead of its customary Wednesday conclusion. Therefore, it will be another day before we know the outcome. The Federal Open Market Committee was formed in 1933, and since 1981, the group has been meeting eight times a year. Two more meetings are scheduled for 2015 with the next one concluding on Wednesday, October 28, and the final one finishing up on Wednesday, December 16.

The current FOMC meeting is the most closely watched one in years, and the financial world will be tuned in to tomorrow’s events. In addition to the usual post-meeting policy statement, tomorrow’s festivities also include the release of the Fed’s latest Summary of Economic Projections, and Fed Chair Janet Yellen will hold a post-meeting press conference. In other words, it will be the perfect time for the Fed to end its seven-year-long, zero-interest-rate policy (“ZIRP”) and to explain to the world its reasons why.

Ten years ago, the concept of interest rates being at 0.25% or 0.50% was pure fantasy. No one could envision rates ever being that low. For the past two years, the market has had occasional panic attacks at the thought of interest rates possibly moving that high. The Fed has been trying to telegraph its intentions, but that is not a complete solution. “Rates have been at extraordinary low levels for years so a move upward in short rates is a big deal even if well-anticipated,” proclaimed Alan Wilde of Baring Asset Management, echoing the sentiment of many Fed watchers.

ZIRP was designed to boost an ailing economy. It accomplished that goal, or at least did its part to help. However, like most major policy changes, there were unintended consequences. Many segments were hurt by ZIRP. Lifelong savers are one group that has been feeling the pain. Work hard, save your money, and live off of the interest was a successful retirement plan for decades. Just eight years ago it was possible to get a safe and secure 5% yield from nearly any money market fund. Since that time, even a nest-egg of $1 million dollars has not been able to generate more than a few hundred dollars in annual interest.

Another group injured by ZIRP has been the firms offering these money market funds. If you think it is tough living on 0% interest, just think how hard it has been for money market funds to keep the value of your account from declining. The reason your money market fund has not lost value is because the asset management firms offering these funds have been absorbing the expenses. According to an article in the Wall Street Journal today, asset managers “have waived more than $30 billion worth of fees on their money market funds over the past six years to keep expenses from eating up the funds’ yields and taking a bite out of the investors’ principal.”

ZIRP will end. Maybe tomorrow, maybe next month, or maybe next year, but it will happen eventually. The market will react, although it won’t be the end of the world. It will probably take years of interest rate hikes before legitimate complaints of interest rates being too high become commonplace.

Investor Heat Map: 9/16/15


Sector momentum scores have a near-linear decline for the top-nine categories and then drop dramatically for Materials and Energy on the bottom.  Additionally, these top nine sectors all posted significant momentum improvements, while Materials was only marginally better and Energy took a step backward.  The culprits are crude oil and other commodity prices.  Currently, there is a global supply glut, coupled with puny demand.  The demand increases of previous economic recoveries are absent.  US production of crude oil has gone through the roof, and Congress is now looking at repealing the 40-year ban on US exports of oil.  Consumer Discretionary and Telecom hold down the top of the rankings for a second week as Technology and Consumer Staples swapped places.  Health Care was the biggest mover, climbing two spots higher in an otherwise subdued week. 


The various style categories are starting to separate after weeks of compressed readings.  The range of momentum scores between the extremes was just nine points two and three weeks ago.  Last week, the range expanded to 11, and today it is at 14.  It doesn’t seem like much, especially when compared to the 48-point range in the sector rankings and the 49-point spread between the global category extremes.  The current lineup continues to favor Growth over Value with the three Growth categories at the top and the three Value categories relegated to the bottom.  In a somewhat rare arrangement, large capitalization stocks are defining the extremes.  Large-Cap Growth is in first, Large-Cap Blend resides in the middle, and Large-Cap Value sits at the very bottom.


None of the global categories posted a decline in momentum from a week ago, although Canada was not able to show an increase either.  Energy is a large portion of the Canadian economy, and the decline of the Energy sector held Canada back this past week.  The top-nine categories are in the same order as a week ago, while China and Latin America swapped places at the bottom.  The US is at the top with the Eurozone in second for a third week.  Currency fluctuations did not play a big part this past week, but the currency volatility that began about six months ago remains a factor.  The peak in strength for the US dollar against the Euro occurred back in mid-March and shows no sign of being surpassed any time soon.  Japanese stocks have experienced a larger-than-usual bout of volatility this past week or so, but it did not result in a change of its fifth-place ranking.  China has also been experiencing significant volatility.  However, unlike most times when volatility is synonymous with declines, the short-term volatility in Chinese stocks has been to the upside.

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“The first rate hike should matter to nobody so long as markets are reassured that further hikes will only be very gradual in nature.  The financial markets may do better if they get the hike out of the way and get the monkey off their back.”

– Mark Dowding, senior portfolio manager, BlueBay Asset Management


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